B. Let’s consider the market for flour in a different town. Assume that it is efficient (i.e. that there are not external costs to producing flour, and no external benefits from consuming it). Price ($/lb) Quantity Supplied (thousands of lbs per day) Quantity Demanded (thousands of lbs per day) 1.5 8 14 2 9 13 2.5 10 12 3 11 11 3.5 12 10 4 13 9 What is the price and quantity of flour sold without government intervention. Graph this equilibrium. XXXX 2. Suppose that, alarmed by the inability of many poorer consumers to buy flour, the government institutes a $2/lb price ceiling. How much flour will suppliers wish to sell, and how much will buyers demand? How much flour will actually be sold? Show this outcome on the same graph you drew for question 1. XXXX 3. Describe, in one sentence each, three problems that this policy might create? Please do not simply copy down phrases from the textbook, but instead describe ways that these problems might be manifest specifically in a local flour market. XXXX
B. Let’s consider the market for flour in a different town. Assume that it is efficient (i.e. that there are not external costs to producing flour, and no external benefits from consuming it).
|
Price ($/lb) |
Quantity Supplied (thousands of lbs per day) |
Quantity Demanded (thousands of lbs per day) |
|
1.5 |
8 |
14 |
|
2 |
9 |
13 |
|
2.5 |
10 |
12 |
|
3 |
11 |
11 |
|
3.5 |
12 |
10 |
|
4 |
13 |
9 |
- What is the price and quantity of flour sold without government intervention. Graph this equilibrium. XXXX
2. Suppose that, alarmed by the inability of many poorer consumers to buy flour, the government institutes a $2/lb
3. Describe, in one sentence each, three problems that this policy might create? Please do not simply copy down phrases from the textbook, but instead describe ways that these problems might be manifest specifically in a local flour market. XXXX
4. Would all consumers prefer the situation with the price ceiling to the situation described in part 1? Which consumers might prefer the price ceiling, and which might not? (Hint: It is useful to think about consumers as being of four types. Draw yourself a 2 x 2 table, whose rows correspond to whether a consumer was able to obtain flour before the price ceiling was imposed, or not; and whose columns correspond to whether they were able to obtain it after, or not. Then ask for each box in your grid, whether you are likely to see consumers in each box, and whether those consumers are happier with or without the price ceiling and why). Present your answer in four bullet points, not in a table.
- XXXX
- XXXX
- XXXX
- XXXX
5. Would suppliers be happier with or without the price ceiling? (Hint: Do something analogous to question 4). XXXX
6. Now, suppose that instead of a price ceiling, the government simply pays flour sellers a subsidy of $1/lb on flour sales. How much flour would be sold? How much would consumers now pay for flour? How much would producers be paid in total for each pound of flour sold? On a separate graph, depict the equilibrium from question 1, alongside the equilibrium with the subsidy. XXXX
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