Question

Student name: ID: Assignment 3 Questions 1. Consider the market for some product X that is represented in the demand and-supply diagram. --- a. Suppose the government decides to impose a price floor at Pl. Describe how this affects price, quantity and marker efficiency. b. Suppose the government decides to impose a price floor at P2. Describe how this affects price, quantity and marker efficiency. c. Suppose the government decides to impose a price ceiling at P1. Describe how this affects price, quantity and marker efficiency. d. Suppose the government decides to impose a price ceiling at P2. Describe how this affects price, quantity and marker efficiency.

Answer 1

a) when a price floor is imposed below the equilibrium price, it is not binding, so there is no change in the equilibrium price and quantity and market efficiency so there is no deadweight loss.

b) when a price floor is imposed above the equilibrium at P2, the quantity supplied exceeds the quantity demanded so there will be an excess supply or surplus in the market which will lead to deadweight loss as the quantity at the equilibrium decreases and is equal to the quantity demanded.

c) When a price ceiling is imposed at P1, the quantity demanded exceeds the quantity supplied so there will be an excess demand or shortage in the market.The price decreases to P1, the quantity decreases and becomes equal to the quantity supplied so there will be a deadweight loss in the market.

d) The ceiling imposed above the equilibrium will be non binding so that there is no change in the equilibrium price or quantity and efficiency does not change and there would be no deadweight loss.