Friday, March 03, 2006

Elasticity and Price Ceilings/Floors

I haven't decided yet what we'll do for the re-quiz - you may have two chances, I'm not sure. The reason why the application quizzes are more difficult is because the assumption is made that you know and understand the material - there's a difference between knowing it and being able to apply it, and the application can get really tricky. This is a good way to prepare for the national exam - because I would estimate it is about 85% application. They assume that you know the material - they are asking you to apply it.

The info next week on taxes and trade involve manipulating the S/D graphs. Colored pencils may be helpful.

Some more questions for you to think about:

1. In an effort to 'support' the price of some agricultural goods, the Dept of Agriculture pays farmers a subsidy in cash for every acre that they leave unplanted. The Agriculture Department argues that the subsidy increases the 'cost' of planting and that it will reduce supply and increase the price of competitively produced agricultural goods. Critics argue that because the subsidy is a payment to farmers, it will reduce costs and lead to lower prices. What argument is correct? Is this a price ceiling or a price floor in action? Explain.

2. Lovers of classical music persuade Congress to impose a price ceiling of $40 per ticket. Does this policy get more or fewer people to attend classical music concerts?

3. The government has decided that the free-market price of cheese is too low. If the government imposes a binding price floor in the cheese market, what would that do to the price and quantity of cheese sold? Is there a surplus or a shortage?


(there are more questions on older posts below)

Extra credit: Answer this to turn in on Monday (at least I'll know who's reading the blog! :) ) This will be worth...let's see...one missing homework assignment (if you have a zero in there) or, if you have all homework in, +10 on a quiz. How's that? --> Suppose the total demand for wheat and the total supply of wheat per month in the Kansas City grain market are as shown (The chart didn't work, so use it this way):
Th. of bushels demanded/Price per bushel/Th. of bushels supplied
85/$3.40/72
80/$3.70/73
75/$4.00/75
70/$4.30/77
65/$4.60/79
60/$4.90/81

a. Graph the demand & supply for wheat. Make sure to label all parts correctly.
b. Suppose the government establishes a price ceiling of $3.70 for wheat. What might prompt the government to establish this price ceiling? Explain the main effects and demonstrate your answer graphically.
c. What if the government established a price floor of $4.60 for wheat? What will be the main effects of the price floor? Show it on your graph.

20 comments:

emkatbuto said...

2. If a price ceiling is put into place at $40 the is going to decrease in price, therefore more people will want to attend the classical music concerts (quanity demanded increases) while the quantity supplied or the amount of seats will decrease. Then causing a shortage.
3. If the government imposes a price floor in the market of cheese there will be a surplus of the good because QD is lower than the QS. The price of cheese will rise while the quantity demanded or the amount of cheese sold will decrease and the quantity suplied or produced will increase causing again the surplus.

Annie said...

2. I agree with Emily, since the price ceiling is below the previous equilibrium people will be paying less and therefore the quantity demanded will increase (similar to the rent in New York City we talked about in class)

Annie said...

1. I think it depends on whether or not the subsidy is enough to cover what could be produced and sold (revenue from that farmland that is not being planted) if the subsidy is less than what could be made from planting a crop then then it increases the cost of "not planting" and it will reduce supply and increase the price of other competitive ag goods. Whereas if the subsidy covers the opportunity cost for not planting the crop then it will reduce costs and lead to lower prices. I think it would be a price ceiling because the government would be limiting the production of crops

gorman said...

2. I would say it would depend on the equilibrium price of the musicals...if the ceiling is below the equilibrium price, it will attract more people

gorman said...

3. it will definetely raise the price of cheese sold...i think it will decrease the quanitity sold because fewer people will be willing to buy the cheese at sucha high price. there is going to be a surplus of cheese

cranjos said...

2.) i agree with tyler...the ceiling that's placed at $40 will not have an effect if the equilibrium price is $30. however, if the equilibrium price is $50 and the ceiling price is below that, this is a binding constraint. the market price will ultimately become the ceiling, something that will result in more people attending musicals.

helen said...

3. price and quantity would both go up and the QD would be lower than the QS, causing a surplus

amepham said...

ok so on a graph with cielings and floors does that mean that the quantity demanded and quantity supplied are different than the point where the supply and demand lines cross

amepham said...

ok so on a graph with cielings and floors does that mean that the quantity demanded and quantity supplied are different than the point where the supply and demand lines cross

amepham said...

nevermind i just answered my own question. i just needed to turn the page. duhh

The Amazing O-clam said...

I haven't read anyone elses posts yet...

2. Generally, it should definately increase the amount of people that want to attend, but any concert that is going to be more than $40 is attended by those snotty upperclassed people who attend those concerts solely to spend the money, and if concerts are that dirt cheap, they won't grace it with their presence.
3. A floor on anything will cause a surplus, as the price will raise, and the quantity demanded will fall, unless it is an inelastic good, in which cheese really is not

forsnic said...

1. in regards to the farmers. it would be a price ceiling because the gov is setting a limit on the price they can charge. also i think the first argument is correct. it will reduce supply and inc price of goods. by not planting, the subsidy will allow the farmers to get money in exchange for TR that they lost by not planting. it helps stabilize the market.

jacnbox said...

because classical music is a symbol of sophsitcation and the upper class, classical music concert audiences tend to consist of these people. not only can they afford the sky high prices, but it is a social event. for the rest of us classical fans, cds and dvds of performances suffice. if the price was reduced to only $40.00, an increase in ticket sales would occur. after all, starving artists and muscians do still exist.

jacnbox said...

cheese. hm...
if a floor is put into place, that causes the price to increase. because the price increases, people probably dont want to buy as much cheese, creating a surplus of, you guessed it, CHEESE.

"happy cheese comes from happy cows, happy cows come from california." yeah...right!

cherie said...

2. If a price ceiling is imposed then more people would want to attend classical music concerts. A price ceiling will decrease the price per ticket increasing the quantity demanded and decreasing the quantity supplied. This will cause a shortage in the number of tickets available for classical music concerts.

cherie said...
This comment has been removed by a blog administrator.
cherie said...

3. By the government imposing a binding price floor in the cheese market the price of cheese would increase. There would also be a increase in the quantity supplied and a decrease in the quantity demanded for cheese. This would be a surplus in cheese.

bjjames said...

2. if a cieling is put in place, then more people will go to see it because the market must have had the equilibrium price higher if it is normal. Therefore there will be a shortage

bjjames said...

3. Well if the gov't creates a floor, then the price of cheese goes up and the quantity demanded goes down creating a surplus of cheese

NicolleM said...

I wish i had known about the ec....that would have been cool