Question

Answer the questions below:

1) It is claimed that price floors and price ceilings both reduce the actual quantity exchanged in a market. Use a diagram or diagrams to support this conclusion, and explain the common sense behind it.

2) Explain why an effective minimum wage law that is not changed over time may eventually become ineffective as demand for workers increases.

3) Last October, the highest-paying passenger on United Flight 815 from Chicago to Los Angeles paid $1,248.51. The lowest-paying passenger on the same flight paid $87.21. Can we say anything about the likely elasticities of demand of the two customers? Use the concepts of marginal analysis and opportunity cost to explain why it might make sense for United Airlines to charge some lucky soul so little.

4) Why are college textbooks so expensive when other books that cost the same to produce have a lower price?

Answer 1

1) When a price floor is imposed we fix the market price at a level above the equilibrium point of demand and supply curves. At this new point there is excess supply over demand. The actual quantity exchanged is less.

When a price ceiling is imposed below the equilibrium market price, there is excess demand over supply. There is a shortage of the product. The actual quantity exchanged is less.

2) An effective minimum wage law will become ineffective as demand for workers increases as the wage rate of workers eil automatically increase. The supply remaining constant, there would be a high demand for labour.

3) The demand for the highest paying passenger is inelastic as he is willing to pay a lot as the price increases. The demand for the lowest paying passenger is likely to be elastic with respect to the price change. If United couldn't find a passenger for their spare seats, they must have sold it at a reduced rate. They received marginal benefit in selling the seat at a lower price rather than letting it be empty but maintaining the price.

4) College textbooks expensive because the demand for them is inelastic with respect to the price change. Students will have to buy the book irrespective of the price.