Question

Want to see the Titanic up close? That’ll be $130,000.00 – and some courage” (Vancouver Sun Newspaper, Monday, January 22, 2018, p. NP3). Last week, in assignment 2, we determined that the mathematical Inverse Demand curve was: P = 216,400 – 1600 [Qd]. Suppose that in-depth research by the company promoting this once-in-a-lifetime “Titanic up-close experience” found their Inverse Supply curve to be P = 20,000 + 2,037.03[Qs]

i. Suppose the Society of once-in-a-lifetime Opportunities for All has successfully lobbied the government to impose a “Price Ceiling” that makes it possible for “normal” citizens to see the Titanic by setting the price at $100,000.00. Using this price, describe the impact on both the Quantity Demanded, Qd and the Quantity Supplied, Qs at the price ceiling price. What is the effect on the current market equilibrium of P = $130,000 and Q = 54? (4 Marks)

ii. Suppose the Society for Fair-Price Visits to the Titanic successfully lobbies the government to impose a “Price Floor” that makes a “fair” return possible for suppliers in the market by setting the allowable price at $145,000.00. Using this price, describe the impact on both the Quantity Demanded, Qd and the Quantity Supplied, Qs at the price ceiling price. What is the effect on the current market equilibrium of P = $130,000 and Q = 54? (4 Marks)

iii. Given the results in parts i and ii above, explain carefully WHY the market would be unable to re-establish a “new” equilibrium Quantity Demanded, Qd and Quantity Supplied, Qs in the market under either of these impositions. (2 Marks)

Answer 1

i.)

A price ceiling is a type of price control initiated by a group of industry regulators or the government. In a price ceiling, the price is controlled in a manner that the price set is below the equilibrium price that would be realised under market dynamics. This type of government intervention is initiated to safeguard the consumers from extortionately high prices that are set by market dynamics and make it unfeasible for the consumers. Since the price is lower than it would have been without control measures the quantity demanded exceeds the quantity supplied and a situation of shortage arises. The direct effect of this on equilibrium price and quantity is that the legally allowed price will be lower than the equilibrium price and there will be a gap between quantity supplied and quantity demanded. At the price of $100,000 the quantity demanded is 73 units and supplied is 39 units, this leads to a shortage of 34 units.

ii.)

A price floor is a type of price control initiated by a group of industry regulators or the government. In a price floor, the price is controlled in a manner that price is set above the equilibrium price that would be realised under market dynamics. This type of government intervention is initiated to safeguard the supplier from exceedingly low prices that are set by market dynamics which make it unfeasible for the suppliers to keep producing. At a price floor set at $145,000, the quantity supplied would exceed the quantity demanded and there would be a surplus in the market. The direct effect of this on equilibrium price and quantity is that the legally allowed price will be higher than the equilibrium price and there will be a gap between quantity supplied and quantity demanded. At the price of $145,000 the quantity demanded is 47 units and supplied is 61 units, this leads to a shortage of 14 units.

iii.) As mentioned in the previous answers, the intervention leads to the price being controlled and deviated away from the equilibrium price that would be realised under market dynamics. In order for an equilibrium to be achieved and the market to be efficient, the market needs to operate under the free dynamics of supply and demand and without intervention. Either type of intervention will lead to a deviation from equilibrium price and quantity and cause the market to be inefficient.