ECNS 105
Problem Set 6
Price Ceilings and Price Floors
Name: _______________________________
1. The following graph captures the supply and demand for textbooks at MSU over the 2015 fall
semester.
Textbooks
220
200
180
Price (Dollars)
160
140
120
100
Supply
80
Demand
60
40
20
0
0
2
4
6
8
10
Quantity (a Semester)
A) Using the graph above, identify the market’s equilibrium price and quantity for textbooks?
B) Compute consumer surplus with the market in equilibrium. (Show your math)
C)
Compute producer surplus with the market in equilibrium. (Show your math)
D) Students petition the school for lower text book prices. As a result, MSU institutes a price
ceiling at $150. What effect does this price ceiling have on consumer and producer surplus for
text books? Does this market experience dead weight loss due to the price ceiling?
E) Still unhappy with textbook prices, students petition the school once more. Again, MSU lowers
the price ceiling to $60. Draw this on the graph.
F) Calculate the new consumer surplus with the $60 price ceiling? What is the producer surplus
with the price ceiling? Does the market experience deadweight loss due to the 60 dollar price
ceiling? (Shade these areas on your graph and calculate the values)
2. For the following questions, determine if these price controls are binding or non-binding. Will these
price controls result in deadweight loss?
A) With an equilibrium price for apartments in Bozeman at 500 a month, the government
imposes a price floor of 600 a month. Is the government intervention binding? Would this price
floor cause deadweight loss in the market for apartments?
B) Snapchat releases a pro version that allows you to pay to save pictures to your phone. The
equilibrium price per picture is 50 cents. Is a price ceiling of 35 cents a picture binding? Would
this price ceiling cause deadweight loss in the market for snapchat service?
C) The market for Nike shoes is operating in equilibrium. A price floor below equilibrium is
imposed. Is this price floor binding on the Nike shoe market? Would this price floor cause
deadweight loss in the market for Nike shoes?
D) The market for (subpar) coffee at the library is operating in equilibrium. A price ceiling above
equilibrium is imposed. Is this price ceiling binding on the (subpar) library coffee market?
Would this price ceiling cause deadweight loss in the market for (subpar) coffee at the library?
3. The following graph illustrates supply and demand for Kanye West Albums in 2015
Kanye West Albums
12
Price (dollars)
10
8
6
4
2
0
0
1
2
3
4
5
6
Quantity (thousands) in 2015
a) Determine the equilibrium price and Quantity?
b)
Calculate consumer surplus at equilibrium. (Show math)
c) Calculate producer surplus at equilibrium. (show math)
7
8
9
10
d) Calculate the total revenue at equilibrium. (guess what… Show math)
e) Kanye West decides to run for President of the United States in the 2020 election. However, he
realizes he has no campaign supporters who will donate money. As a result, Kanye decides to
use his record sales to fund his presidential bid. Kanye decides to sell his albums at 8 dollars per
unit. Draw this self-imposed price floor on the graph.
f)
Calculate the new producer surplus after Kanye’s price floor. (Show math)
g) Calculate the new consumer surplus after Kanye’s price floor. (show math)
h) Calculate deadweight loss after Kanye’s price floor. (Show math)
i)
Calculate total revenue after Kanye’s price floor. (Show math)
j)
Who benefits from this new price floor, consumers or producers? Who losses, consumers or
producers? Explain.