Homework: prices: free, controlled, and relative (ch 04)

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How prices allocate resources

Suppose that there are three beachfront parcels of land available for sale in Asilomar, and six people who would each like to purchase one parcel. Assume that the parcels are essentially identical and that the minimum selling price of each is $445,000. The following table states each person’s willingness and ability to purchase a parcel.

   

Willingness and Ability to Purchase

 

(Dollars)

 

Hubert

600,000

 

Kate

510,000

 

Manuel

470,000

 

Poornima

420,000

 

Shen

390,000

 

Valerie

380,000

Which of these people will buy one of the three beachfront parcels? Check all that apply.

   

Hubert

   

   

   

   

   

Assume that the three beachfront parcels are sold to the people that you indicated in the previous section. Suppose that a few days after the last of those beachfront parcels is sold, another essentially identical beachfront parcel becomes available for sale at a minimum price of $432,500. This fourth parcel be sold because will purchase it from the seller for at least the minimum price.

(2)Price controls in the Florida orange market

The following graph shows the annual market for Florida oranges, which are sold in units of 90-pound boxes.

Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

Created with Raphaël 2.1.2

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PRICE (Dollars per box)

QUANTITY (Millions of boxes)

Demand 

Supply 

Graph Input Tool

   

Market for Florida Oranges

 

15

 

900

378

   

Price

(Dollars per box)

   

Quantity Demanded

(Millions of boxes)

   

Quantity Supplied

(Millions of boxes)

In this market, the equilibrium price is$per box, and the equilibrium quantity of oranges ismillion boxes.

For each price listed in the following table, determine the quantity of oranges demanded, the quantity of oranges supplied, and the direction of pressure exerted on prices in the absence of any price controls.

   

Price

Quantity Demanded

Quantity Supplied

Pressure on Prices

 

(Dollars per box)

(Millions of boxes)

(Millions of boxes)

 

20

 

30

True or False: A price ceiling below $25 per box is not a binding price ceiling in this market. (Economists call a price ceiling that prevents the market from reaching equilibrium a binding price ceiling.)

   

True

   

(4)The effects of rent control

Suppose the following graph shows the demand for, and supply of, apartments in New York City.

Use the black point (plus symbol) to indicate the equilibrium monthly rent and quantity of apartments in the absence of price controls. Then use the green point (triangle symbol) to fill the area representing consumers’ surplus, and use the purple point (diamond symbol) to fill the area representing producers’ surplus.

Created with Raphaël 2.1.2

Equilibrium

CS

PS

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MONTHLY RENT (Dollars per apartment)

QUANTITY OF APARTMENTS (Millions per month)

Demand

Supply

Suppose that the government decides to impose a rent control of $1,900 per month on rental apartments in New York City. On the following graph, use the green point (triangle symbol) to shade the area representing consumers’ surplus in the presence of rent control. Use the purple point (diamond symbol) to shade the area representing producers’ surplus after the rent control. Then use the grey point (star symbol) to shade the area representing deadweight loss resulting from the rent control.

Created with Raphaël 2.1.2

CS w/ Rent Control

PS w/ Rent Control

Deadweight Loss

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MONTHLY RENT (Dollars per apartment)

QUANTITY OF APARTMENTS (Millions per month)

Demand

Supply

Rent Ceiling

In the presence of the rent control, consumers’ surplus by per month and producers’ surplus by per month. The price ceiling on rent causes per month of deadweight loss. Tool tip: Click on the shaded regions in the graph to see their areas.

Which of the following are generally true of rent control? Check all that apply.

   

Everyone who needs a place to live can rent an apartment.

   

   

   

   

Minimum wage legislation

The following graph shows the labor market in the fast-food industry in the fictional town of Supersize City.

Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

Created with Raphaël 2.1.2

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WAGE (Dollars per hour)

LABOR (Thousands of workers)

Demand 

Supply 

Graph Input Tool

   

Market for Labor in the Fast Food Industry

 

6

 

900

378

   

Wage

(Dollars per hour)

   

Labor Demanded

(Thousands of workers)

   

Labor Supplied

(Thousands of workers)

In this market, the equilibrium hourly wage is$, and the equilibrium quantity of labor isthousand workers.

Suppose a senator introduces a bill to legislate a minimum hourly wage of $6. This type of price control is called a .

For each of the wages listed in the following table, determine the quantity of labor demanded, the quantity of labor supplied, and the direction of pressure exerted on wages in the absence of any price controls.

   

Wage

Labor Demanded

Labor Supplied

Pressure on Wages

 

(Dollars per hour)

(Thousands of workers)

(Thousands of workers)

 

12

 

8

True or False: A minimum wage below $10 per hour is not a binding minimum wage in this market. (Economists call a minimum wage that prevents the labor market from reaching equilibrium a binding minimum wage.)

   

True

   

Taxes and the impact on relative price

In her school’s food court, Martha notices that a carton of juice costs $1.75 and a can of soda costs $1.25. Since Martha just finished studying for an economics exam, she immediately calculates that the relative price of a carton of juice is   per  .

Suppose that school administrators want to encourage healthy choices and decide to impose a $0.25 price increase on cans of soda. Given that the absolute price of a carton of juice is unchanged, the relative price of a carton of juice  .

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