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ASSIGNMENT 2

Use the information on the kumquat market in the table to answer the following
questions:

a. What are the equilibrium price and quantity? How much revenue do kumquat
producers receive when the market is in equilibrium? Draw a graph showing the
market equilibrium and the area representing the revenue received by kumquat
producers.
b. Suppose the federal government decides to impose a price floor of $30 per
crate. Now how many crates of kumquats will consumers purchase? How much
revenue will kumquat producers receive? Assume that the government does not
purchase any surplus kumquats. On your graph from question (a), show the price
floor, the change in the quantity of kumquats purchased, and the revenue
received by kumquat producers after the price floor is imposed.
c. Suppose the government imposes a price floor of $30 per crate and purchases
any surplus kumquats from producers. Now how much revenue will kumquat
producers receive? How much will the government spend on purchasing surplus
kumquats? On your graph from question (a), show the area representing the
amount the government spends to purchase the surplus kumquats.

3.7 Suppose that the government sets a price floor for milk that is above the
competitive equilibrium price.
a. Draw a graph showing this situation. Be sure your graph shows the
competitive equilibrium price, the price floor, the quantity that would be sold in
competitive equilibrium, and the quantity that would be sold with the price floor.
b. Compare the economic surplus in this market when there is a price floor and
when there is no price floor.

Use the information on the market for apartments in Bay City in the table to
answer the following questions:

a. In the absence of rent control, what is the equilibrium rent, and what is the
equilibrium quantity of apartments rented? Draw a demand and supply graph of
the market for apartments to illustrate your answer. In equilibrium, will there be
any renters who are unable to find an apartment to rent or any landlords who are
unable to find a renter for an apartment?
b. Suppose the government sets a ceiling on rents of $600 per month. What is
the quantity of apartments demanded, and what is the quantity of apartments
supplied?
c. Assume that all landlords abide by the law. Use a demand and supply graph to
illustrate the effect of this price ceiling on the market for apartments. Be sure to
indicate on your graph each of the following: (i) the area representing consumer
surplus after the price ceiling has been imposed, (ii) the area representing
producer surplus after the price ceiling has been imposed, and (iii) the area
representing the deadweight loss after the ceiling has been imposed.
d. Assume that the quantity of apartments supplied is the same as you
determined in (b). But now assume that landlords ignore the law and rent this
quantity of apartments for the highest rent they can get. Briefly explain what this
rent will be.

d. If landlords supply only 250,000 apartments and ignore the price ceiling, they
can charge $1,000; $1,000 is the highest rent that consumers are willing to pay
to rent 250,000 apartments.

University towns with major football programs experience an increase in demand


for hotel rooms during home football weekends. Hotel management responds to
the increase in demand by increasing the price they charge for a room.
Periodically, there is an outcry against the higher prices and accusations of
price gouging.
a. Draw a demand and supply graph of the market for hotel rooms in
Boostertown for weekends with home football games and another graph for
weekends without home football games. If the Boostertown city council passes a
law stating that prices for rooms are not allowed to rise, what would happen to
the market for hotel rooms during home football game weekends? Show your
answer on your graph.
b. If the prices of hotel rooms are not allowed to increase, what will be the effect
on out-of-town football fans?
c. How might the city councils law affect the supply of hotel rooms over time?
Briefly explain.
d. University towns are not the only places that face peak and non-peak
seasons. Can you think of other locations that face a large increase in demand
for hotel rooms during particular times of the year? Why do we typically not see
laws limiting the prices hotels can charge during peak seasons?

c. Over time, the supply of hotel rooms will most likely decline. With lower prices
of hotel rooms reducing economic profits, some hotels will exit the industry. The
exit of hotels makes the shortage of hotel rooms during home football game
weekends more severe.
d. Ski resorts and vacation spots face peak seasons. Laws limiting the prices
hotels can charge during peak seasons would decrease the quantity of hotel
rooms available and, therefore, also decrease the number of tourists visiting
these communities and spending money on local businesses.

Suppose that initially the gasoline market is in equilibrium, at a price of $3.00


per gallon and a quantity of 45 million gallons per month. Then a war in the
Middle East disrupts imports of oil into the United States, shifting the supply
curve for gasoline from S1 to S2. The price of gasoline begins to rise, and
consumers protest. The federal government responds by setting a price ceiling of
$3.00 per gallon. Use the graph at the top of the next column to answer the
following questions.
a. If there were no price ceiling, what would be the equilibrium price of
gasoline, the quantity of gasoline demanded, and the quantity of gasoline
supplied? Now assume that the price ceiling is imposed and that there is
no black market in gasoline. What are the price of gasoline, the quantity of
gasoline demanded, and the quantity of gasoline supplied? How large is
the shortage of gasoline?

b. Assume that the price ceiling is imposed, and there is no black market in
gasoline. Show on the graph the areas representing consumer surplus,
producer surplus, and deadweight loss.
c. Now assume that there is a black market, and the price of gasoline rises to
the maximum that consumers are willing to pay for the amount supplied
by producers at $3.00 per gallon. Show on the graph the areas
representing producer surplus, consumer surplus, and deadweight loss.
d. Are consumers made better off with the price ceiling than without it?
Briefly explain.