Question

For this workbook assignment, you need to create two additional problems where the government has placed price restrictions on what would otherwise be competitive markets. You must include a price ceiling and a price floor. 1. Come up with a sentence or two explaining what is happening and why the government is getting involved. Try to be original here, even though there are only so many different times we see price floors and ceilings. 2. Graph your market in the current equilibrium. Be sure you clearly label all the necessary prices and quantities on the axis. You may not use the same numbers used in the workbook, the videos, or the textbook examples. 3. Solve for original CS & PS and total market surplus. 4. Show on your graph (with a RED pencil/pen) what happens to the original CS and PS with the new price restriction (you don't need to use the letters in your example, since you can show it graphically). 5. Answer the same questions mathematically that are asked in the workbook: What are the total dollar amounts that now correspond to the New Consumer Surplus, New Producer Surplus, area that was transferred, Dead Weight Loss, and Remaining Surplus?

Answer 1

The following solution will include answers to part 1 to 4

1) The price ceiling is done to benefit consumers, it is the limit to pricing of a product, i.e how high can the price be fixed for a commodity. Let us assume that the price ceiling is done for a medicine named X which is important to 3/4th of the population in the country. Price flooring on the other hand is lowest that you can charge a product with price, here it can be used to set up the minimum support price given to the farmers for their produce.

2) In the below graph you can see that the equilibrium point is at the interjection of AD and AS curve, with quantity Q1 and at a price P1.

3) In the graph the original Consumer Surplus is at quantity Q1, whereas the original Producer surplus was at P1 price.

4) When the restriction are added, the demand and supply curve shift in Excess demand and Excess supply respectively. after this the intersection point of the two new demand curve (Highlighted) gives the new price at point P4 and quantity at Q5. We can see this in the following figure