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Chapter 2: Q 7 (page 78)

What is the effect of a price ceiling on the quantity demanded of the product? What is the effect of a price ceiling

on the quantity supplied? Why exactly does a price ceiling cause a shortage?

Short Answer

Expert verified

excess demand

supply remains same

shortage occurs

Step by step solution

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01

Q7

A price ceiling is a legal maximum price that one pays for some good or service. A government imposes price ceilings

in order to keep the price of some necessary good or service affordable. This leads to excess demand and shortage of supply. the price ceiling leads to rise in quantity demanded but the supply remains the same. This leads to demand exceeding supply, resulting into shortage in supply.

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Most popular questions from this chapter

A vegetable fiber is traded in a competitive world market, and the world price is \(9 per pound. Unlimited quantities are available for import into the United States at this price. The U.S. domestic supply and demand for various price levels are shown as follows:

PRICEU.S. SUPPLY (MILLIONS)U.S. (DEMAND) (MILLIONS)
3234
6428
9622
12816
151010
18124

  1. What is the equation for demand? What is the equation for supply?

  2. At a price of \)9, what is the price elasticity of demand? What is it at a price of \(12?

  3. What is the price elasticity of supply at \)9? At $12?

  4. In a free market, what will be the U.S. price and level of fiber imports?

Does a price ceiling change the equilibrium price?

Refer to Example 2.10 (page 81), which analyzes the effects of price controls on natural gas.

  1. Using the data in the example, show that the following supply and demand curves describe the market for natural gas in 2005–2007:

Supply: Q = 15.90 + 0.72PG+ 0.05PO

Demand: Q = 0.02 - 1.8PG+ 0.69PO

Also, verify that if the price of oil is \(50, these curves imply a free-market price of \)6.40 for natural gas.

  1. Suppose the regulated price of gas was \(4.50 per thousand cubic feet instead of \)3.00. How much excess demand would there have been?

  2. Suppose that the market for natural gas remained unregulated. If the price of oil had increased from \(50 to \)100, what would have happened to the free market price of natural gas?

Let’s think about the market for air travel. From August 2014 to January 2015, the price of jet fuel increased

roughly 47%. Using the four-step analysis, how do you think this fuel price increase affected the equilibrium price

and quantity of air travel?

Suppose the demand curve for a product is given byQ= 300 - 2P+ 4I, whereIis average income measured in thousands of dollars. The supply curve isQ= 3P- 50.

a. IfI= 25, find the market-clearing price and quantity for the product.

b. IfI= 50, find the market-clearing price and quantity for the product.

c. Draw a graph to illustrate your answers.
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