Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 4: Problem 8

In Allentown, Pennsylvania, in the summer of \(2014,\) the average price of a gallon of gasoline was \(\$ 3.68-\) a 22 -cent increase from the year before. Many consumers were upset by the increase. One consumer was quoted in a local newspaper as saying, "It's crazy. The government should step in." Suppose the government had stepped in and imposed a price ceiling equal to the old price of \(\$ 3.46\) per gallon. a. Draw a graph showing the effect of the price ceiling on the market for gasoline. Be sure that your graph shows: i. The price and quantity of gasoline before and after the price ceiling is imposed ii. The areas representing consumer surplus and producer surplus before and after the price ceiling is imposed iii. The area of deadweight loss b. Will the consumer who was complaining about the increase in the price of gasoline definitely be made better off by the price ceiling? Briefly explain.

Short Answer

Expert verified
A price ceiling set below the market equilibrium price (\$3.68) at the old price (\$3.46) will lead to excess demand and shortage in the market causing a Deadweight Loss. While the price of gasoline is lower (benefiting some consumers), the shortage can leave others, possibly including the complainer, without adequate gasoline.

Step by step solution

01

Draw Initial Market Equilibrium

Start a graph with ‘Quantity of Gasoline’ on the X-axis and ‘Price’ on the Y-axis. Then, draw a downward sloping Demand Curve and an upward sloping Supply Curve. The intersection of both curves is the Market Equilibrium, representing the old price (\$3.46 per gallon) and corresponding quantity of gasoline.
02

Identify the Consumer and Producer Surplus

On the graph, the Consumer Surplus is the area above the price line (below the Demand curve, up to Market Equilibrium) and Producer Surplus is below the price line (above the Supply curve, up to Market Equilibrium).
03

Implement the Price Ceiling

Draw a horizontal line through the Y-axis at \$3.46, which is below the new price of \$3.68 (Market Equilibrium). This line represents the Price Ceiling imposed by the government.
04

Identify the Effect of Price Ceiling

Since the imposed price is lower than the new market price, it leads to excess demand and shortage of gasoline. It also changes the areas of Consumer and Producer Surpluses. The Consumer Surplus increases, but the Producer Surplus decreases.
05

Calculate the Deadweight Loss

The Deadweight Loss refers to the decrease in total social surplus (Consumer Surplus + Producer Surplus) caused by this price ceiling. On the graph, it is represented by the area between the Supply and Demand curves, from the vertical line from the quantity demanded at \$3.46 to the original equilibrium quantity.
06

Analyze the Impact on the Consumer

The consumer complaining about the price increase may not be better off. Despite a lower price, the decrease in supply may leave some consumers without gasoline due to shortage caused by the price ceiling.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

As readers of Herman Melville's 1851 novel Moby Dick know, at one time oil made from whale blubber was an important source of energy that was widely used by households and firms in oil lamps. Other sources of energy replaced whale oil in the second half of the nineteenth century, and today many Americans consider whales only as a source of entertainment on visits to aquariums and whale watching excursions. But some species of whales - including baleen and gray whales- are in danger of extinction. The U.S. Department of Agriculture estimates that more than 9 billion chickens are raised for food annually. Chickens, unlike whales, are not threatened with extinction. Briefly explain why.

Use the information on the market for apartments in Bay City in the table to answer the following questions. $$ \begin{array}{r|c|c|} \hline \text { Rent } & \text { Quantity Demanded } & \text { Quantity Supplied } \\ \hline \$ 500 & 375,000 & 225,000 \\ \hline 600 & 350,000 & 250,000 \\ \hline 700 & 325,000 & 275,000 \\ \hline 800 & 300,000 & 300,000 \\ \hline 900 & 275,000 & 325,000 \\ \hline 1,000 & 250,000 & 350,000 \\ \hline \end{array} $$ a. In the absence of rent control, what is the equilibrium rent, and what is the equilibrium quantity of apartments rented? Draw a demand and supply graph of the market for apartments to illustrate your answer. In equilibrium, will there be any renters who are unable to find an apartment to rent or any landlords who are unable to find a renter for an apartment? b. Suppose the government sets a ceiling of \(\$ 600\) per month on rents. What is the quantity of apartments demanded, and what is the quantity of apartments supplied? c. Assume that all landlords abide by the law in part (b). Use a demand and supply graph to illustrate the effect of this price ceiling on the market for apartments. \(\mathrm{Be}\) sure to indicate on your graph each of the following: (i) the area representing consumer surplus after the price ceiling has been imposed, (ii) the area representing producer surplus after the price ceiling has been imposed, and (iii) the area representing the deadweight loss after the price ceiling has been imposed. d. Assume that the quantity of apartments supplied is the same as you determined in (b), but now assume that landlords ignore the law and rent this quantity of apartments for the highest rent they can get. Briefly explain what this rent will be.

What is a black market? Under what circumstances do black markets arise?

Use the information on the kumquat market in the table to answer the following questions. $$ \begin{array}{c|c|c} \begin{array}{c} \text { Price } \\ \text { (per crate) } \end{array} & \begin{array}{c} \text { Quantity Demanded } \\ \text { (millions of crates } \\ \text { per year) } \end{array} & \begin{array}{c} \text { Quantity Supplied } \\ \text { (millions of crates } \\ \text { per year) } \end{array} \\ \hline \$ 10 & 120 & 20 \\ \hline 15 & 110 & 60 \\ \hline 20 & 100 & 100 \\ \hline 25 & 90 & 140 \\ \hline 30 & 80 & 180 \\ \hline 35 & 70 & 220 \\ \hline \end{array} $$ a. What are the equilibrium price and quantity? How much revenue do kumquat producers receive when the market is in equilibrium? Draw a graph showing the market equilibrium and the area representing the revenue kumquat producers receive. b. Suppose the federal government decides to impose a price floor of \(\$ 30\) per crate. Now how many crates of kumquats will consumers purchase? How much revenue will kumquat producers receive? Assume that the government does not purchase any surplus kumquats. On your graph from part (a), show the price floor, the change in the quantity of kumquats purchased, and the revenue kumquat producers receive after the price floor is imposed. c. Suppose the government imposes a price floor of \(\$ 30\) per crate and purchases any surplus kumquats from producers. Now how much revenue will kumquat producers receive? How much will the government spend on purchasing surplus kumquats? On your graph from part (a), show the area representing the amount the government spends to purchase the surplus kumquats.

Define rivalry and excludability and use these terms to discuss the four categories of goods.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free