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.