Question

Which of the following statements is (are) correct?
(x) Price ceilings and price floors usually reduce the welfare of society because quantity demanded does not equal quantity supplied if the price control is binding.
(y) The particular price that results in quantity supplied being equal to quantity demanded is the best price because it maximizes the welfare of buyers and sellers.
(z) A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it maximizes the combined welfare of buyers and sellers.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Suppose the United States changed its laws to allow for the legal sale of a kidney. According to the textbook, which of the following statements is (are) correct?
(x) If the government allowed a free market in organs for transplant then there would be an increase in the price of a kidney and a decrease in the shortage of kidneys for transplant.
(y) At present, the maximum legal price for a human kidney is $0. The price of $0 maximizes both producer surplus and consumer surplus.
(z) If the government allowed a free market for transplant organs such as kidneys to exist, critics argue that such a market would benefit the rich but not the poor.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Answer 1

1.(X) A price ceiling below the equilibrium price is binding price because at this price there would be a shortage. The price cannot move up. In such a situation supply cannot increase and supply does not equate with demand. On the other hand a price floor above the equilibrium price is binding because no sale is allowed below the legally fixed price. This cause surplus in the market. Demand cannot expand because price does not come down. In this situation the demand cannot equate with supply. Both surplus and shortage reduce the welfare of the society.

This statement is correct.

(Y).The buyer’s surplus and seller’s surplus is maximum when the quantity demanded of a commodity is equal to the quantity supplied. At the equality of quantity demand with quantity supply the marginal benefit is equal to marginal cost.

This statement is correct.

(Z). The equilibrium price is one where the quantity demanded is equal to the quantity supplied. At the equilibrium of the market the welfare of the buyers and sellers is maximum.

This statement is correct.

Answer: A. (X), (Y) and (Z).

2. (X) If the government legalizes the sale of organ, the shortage of kidney transplant will be removed because there would be more suppliers of kidney. As the supply increase the price does not increase, instead it falls.

This statement is incorrect.

(Y) At zero price for Kidney only benefit the consumers. At zero price there is no supply. Trade will not take place. A market consists of buyers and sellers. Each commodity is traded at a price. In the absence of price and sellers, the market is incomplete and there would be no question of consumer’s surplus and producer’s surplus.

This statement is incorrect.

(Z). A free market for kidney transplantation only benefit the rich people because they only can access to the market. The poor people would be deprived of such facility due to the lack of sufficient income.

This statement is correct.

Answer: E. (Z) only