Chapter 8, Problem 3CYU

a)

To determine

The question requires us to illustrate the statements with the help of the given figure.

Answer to Problem 3CYU

The opponents and proponents both are correct.

Explanation of Solution

Point E represents the initial market situation where P_E is the equilibrium price and Q_E is the equilibrium quantity in the market.

When government sets a price floor at P_F which is higher than the equilibrium price, the quantity demanded contracts from Q_E to Q_F, and the quantity supplied expands from Q_E to Q_S level.

Since the quantity supplied is greater than the quantity demanded, the market will have a surplus of gas.

Size of surplus = AB

Here, the opponents and proponents both are correct.

Explanation: Due to an increase in the price, the quantity supplied rises, and the gas owner would sell gas at a higher price and get a profit. So, proponents are correct.

When the price rises above the equilibrium price, the quantity demanded falls because some consumers would prefer not to purchase the product at all. So, the gas station owner will lose customers and thus, opponents are correct.

Economics Concept Introduction

A price floor is an approach to regulating market price levels. The government always sets a price floor above the equilibrium price so, consumers are willing to buy fewer goods at a price floor because they are getting them at a higher price, while producers are willing to supply more because they are receiving a higher price for their goods, so a price floor leads to a persistent surplus of goods in the market. As a result, there is a surplus (an excess of the product) in the market because the quantity supplied is greater than the quantity demanded.

b)

To determine

The question requires us to illustrate the statements with the help of the given figure.

Answer to Problem 3CYU

The opponents and proponents both are correct.

Explanation of Solution

Point E represents the initial market situation where P_E is the equilibrium price and Q_E is the equilibrium quantity in the market.

When government sets a price floor at P_F which is higher than the equilibrium price, the quantity demanded contracts from Q_E to Q_F, and the quantity supplied expands from Q_E to Q_S level.

Since the quantity supplied is greater than the quantity demanded, the market will have a surplus of gas.

Size of surplus = AB

Here, the opponents and proponents both are correct.

Explanation: when the government sets a price floor above the equilibrium price, the producers consider this high price as an incentive to produce high-quality goods. So, the gas station owner will provide better services. Therefore, proponents are correct.

The opponents are correct because when the price rises above the equilibrium price, the quantity demanded falls as some consumers would prefer not to purchase the product.

c)

To determine

The question requires us to illustrate the statements with the help of the given figure.

Answer to Problem 3CYU

Proponents are wrong while opponents are correct.

Explanation of Solution

Point E represents the initial market situation where $P_E$ is the equilibrium price and $Q_E$ is the equilibrium quantity in the market.

When government sets a price floor at $P_F$ which is higher than the equilibrium price, the quantity demanded falls from $Q_E$ to $Q_F$ , and the quantity supplied increases from $Q_E$ to $Q_S$ level.

Since the quantity supplied is greater than the quantity demanded, the market will have a surplus of gas.

Size of surplus = AB

Here, Proponents are wrong while opponents are correct.

Proponents are wrong as a price floor hurts the consumers and producers both because producers lose their customers as customers will prefer not to buy products at a higher price. So, a price floor is hurting consumers, and up to an extent few producers are hurt by a price floor.

Opponents are correct because a higher price floor incentivizes consumers to buy gas from cheaper sources. A price floor promotes black marketing, bribery, and corruption in the market.