MCQ (15 points)

1. A price ceiling

a. has no effect.

b. is set to protect producers.

c. will cause a shortage.

d. will cause a surplus.

e. a and b are correct

f. b and c are correct

2. A legal minimum price at which a good can be sold is a

a. price floor.

b. price stabilization.

c. price support.

d. price ceiling.

3. In the figure shown, a price ceiling is shown in

a. panel (a).

b. panel (b).

c. both panel (a) and panel (b).

d. neither panel (a) nor panel (b).

Problem 1 (15 points)

According to the graph shown, answer the questions:

1. If the government imposes a price floor of $6.00 in this market, what will be the result shortage or surplus? Calculate

2. According to the graph shown, at which price ceiling would exist?

Problem 2 (50 points)

Below is the graph for market of Good A

The demand and supply for bottled water are summarized by the graph below:

a) What are equilibrium price and equilibrium quantity on the market?

b) Calculate consumer surplus, producer surplus and total surplus at Equilibrium.

c) If the government imposes price floor of $1.75 in this market, would there be an excess supply or shortage? Calculate.

d) Shade the areas of consumer surplus, producer surplus and deadweight loss after setting the floor at $1.75.

e) Calculate the value of producer surplus after the price floor is imposed.

f) Assume, now, that the government imposes a price ceiling of $0.50. Would there be an effect on the market (excess, shortage or nothing happens)? Explain.

Essay (20 points)

What happens to producer surplus when a price ceiling (below the equilibrium price) is enacted? What happens to consumer surplus? Will there be a shortage or a surplus in the new equilibrium?

What are the negative consequences of imposing price ceiling and price floor?