Question

Price controls in the Florida orange market
The following graph shows the annual market for Florida oranges, which are sold in units of 90-pound boxes.
Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.
Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

In this market, the equilibrium price is $ ____per box, and the equilibrium quantity of oranges is _____ million boxes.

 For each of the prices listed in the following table, determine the quantity of oranges demanded, the quantity of oranges supplied, and the direction of pressure exerted on prices in the absence of any price controls.

 

 True or False: A price ceiling below $25 per box is not a binding price ceiling in this market.

•  True

•  False

 Because it takes many years before newly planted orange trees bear fruit, the supply curve in the short run is almost vertical. In the long run, farmers can decide whether to plant oranges on their land, to plant something else, or to sell their land altogether. Therefore, the long-run supply of oranges is much more price sensitive than the short-run supply of oranges.

 Assuming that the long-run demand for oranges is the same as the short-run demand, you would expect a binding price ceiling to result in a _______  that is _______  in the long run than in the short run.

Answer 1

At equilibrium point, market demand and market supply curve intersects each other.

In this market, the equilibrium price is $25 per box, and the equilibrium quantity of oranges is 450 million boxes.

If Demand > Supply => There is shortage in market=> Upward pressure on prices

If Demand < Supply => There is surplus in market => Downward pressure on prices.

Price (Dollars per box)	Quantity Demanded (Million of boxes)	Quantity supplied (Million of boxes)	Pressure on prices
35	0	540	Downward
15	900	378	Upward

Note: The quantity supplied at price $35 might be different from original value. Please use "Graph Input Tool" to get the original value.

Price ceiling is binding if it is set below the equilibrium price.

Equilibrium price is 25. Therefore, price ceiling will be binding if it is set below $25

False: A price ceiling below 25 is not a binding price ceiling in the market.

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A binding price ceiling creates shortage in market.

Assume that the long run demand for oranges is same as short run demand.  

In long run, supply of oranges is more price sensitive than in short run.

Therefore, binding price ceiling creates shortage that is greater in the long run than in short run.

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