 CHECKPOINT 7.1: Price Ceilings
1a. The equilibrium rent is $150 a week and the equilibrium quantity is 2,000
rooms rented.
1b. At a rent ceiling of $125 a week, the quantity of rooms demanded is 2,500
and there is a shortage of 500 rooms on campus. The allocation remains
efficient because the supply of rooms is perfectly inelastic. As a result, the
quantity of rooms rented with the rent ceiling remains 2,000 so that there is
no deadweight loss from underproduction. Both consumer surplus and
producer surplus shrink. The allocation is not fair because it prevents
voluntary exchange and does not necessarily reallocate housing to the
poorest students.
1c. The people who gain from the ceiling are those students who get the
cheaper apartments on campus. Assuming the enrollment doesn’t change,
the off-campus housing owners gain because the increased demand from
students increases the rent charged off campus. The losers include those
students who are unable to rent on campus at the $125 ceiling and the offcampus renters who must pay the higher rent. The university also loses
because it must charge a lower rent.
1d. If a black market develops, rents will range from $125 a week to $150 a
week. The highest rent that someone would offer is $150 a week. This rent
equals the willingness of someone to pay for the 200th room.
A black market is inefficient because marginal benefit exceeds marginal cost
and a deadweight loss arises.
A black market is not fair because it does not provide rooms to the students
who are most in need.
CHECKPOINT 7.2: Price Floors
1a. The equilibrium wage rate is $10 an hour and the equilibrium quantity is
100 tutors.
1b. At a minimum wage of $15 an hour, only 50 tutors are hired and 150 people
want to work as tutors. So 100 tutors are unemployed.
1c. An $8 an hour minimum wage has no effect because it is below the
equilibrium wage. The equilibrium wage rate remains at $10 an hour and
the equilibrium quantity remains at 100. No tutors are unemployed.
1d. The $8 an hour minimum wage is efficient because it has no effect on the
market equilibrium. According to the “fair results” view, it is unfair
because some students have different income than other students.
According to the “fair rules” view, it is fair as a competitive equilibrium.
1e. The minimum wage rate of $15 is inefficient because marginal benefit
exceeds the marginal cost and there is a deadweight loss. The outcome is
unfair. It benefits only the tutors who get the jobs and the unemployed
tutors earn nothing. Students are unable to hire the tutors they want.
1f. If a black market develops and tutors can charge below the minimum wage,
the supply curve shows that some are willing to tutor for less than $5 an
hour.
3ai. If the equilibrium price of gasoline is $1.50 a gallon, then a price ceiling of
$2.00 a gallon has no effect on the market because it does not change the
equilibrium price.
3aii. If the equilibrium price of gasoline is $2.50 a gallon, then a price ceiling of
$2.00 a gallon results in a shortage. The quantity of gasoline demanded at
$2.00 a gallon exceeds the quantity supplied. A black market is likely to develop,
in which consumers buy gasoline at prices higher than the price ceiling. In
addition, a great deal of additional search activity arises as driv‐ ers look for gas
stations that are open and willing to sell gasoline.
3b. The situation in part (i) is efficient because at the equilibrium the marginal
benefit equals the marginal cost. The situation in part (ii) is inefficient be‐ cause
the marginal benefit of a gallon of gasoline exceeds the marginal cost and so there
is a deadweight loss.
. 4a. If the ceiling is set above the equilibrium fee, the ceiling has no effect on the
amount of work, consumer surplus, or producer surplus.
If the ceiling is
set below the equilibrium fee, the quantity of work supplied decreases. In
this case, there is a shortage and increased search. The con‐ sumer surplus
decreases and the law firms’ producer surplus decreases.
. 4b. If the fee ceiling is set below the equilibrium fee, the ceiling results in an
inefficient use of resources. The marginal benefit exceeds the marginal cost
and a deadweight loss arises. Additionally, added resources are used as
people increase their search activity to find an attorney.