10/6 KEY - Iowa State University

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Price Ceilings
Supplemental Instruction
Iowa State University
Leader:
Course:
Instructor:
Date:
Veronica
Econ 101
Kreider
10-6-14
1. Define and Draw an example:
a) price ceiling: A government-imposed maximum price in a market.
b) short side of the market: The smaller of quantity supplied and quantity demanded at a
particular price
c) shortage: An excess demand not eliminated by a rise in price, so that quantity
demanded continues to exceed quantity supplied
d) black market: A market in which goods are sold illegally at a price above the legal
ceiling.
e) rent control: Government-imposed maximum rents on apartments and homes
2. In Figure 2, a price ceiling for maple syrup
caused a shortage, which led to a black
market price ($4) higher than the initial
equilibrium price ($3). Suppose that the
price ceiling remains in place for years.
Over time, some maple syrup firms go out
of business. With fewer firms, the supply
curve in the figure shifts leftward by
10,000 bottles per month. After the shift in
the supply curve:
a)What is the shortage caused by the $2 price ceiling? (Provide a numerical answer.)
$30,000
b) What is the deadweight loss?
≈ 2 * ½ * 10,000 ≈ 10,000
c) If all of the maple syrup is once again purchased for sale on the black market, will the
black market price be greater, less than, or the same as that in Figure 2? Explain briefly.
greater
3. What must a government do to keep a price ceiling in place?
Create laws & ban black markets.
4. Holding a product’s price below its equilibrium level will
a) insure that everyone obtains the quantity they desire to purchase
b) encourage an increased production of the good
c) result in less of the good being consumed
d) eliminate the incentive for black-market profiteering
e) result in an excess supply of the good
5. Fill in the blank: A price ceiling creates a shortage and increases the time and trouble
required to buy the good. While the price decreases, the opportunity cost may rise.
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