Question

2. 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 Graph Input Tool Market for Florida Oranges 50 45 40 35 2 30 25 20 Price (Dollars per box) 15 Quanti Demanded Quantity Supplied (Millions of boxes) Supply 500 0 (Millions of boxes) Demand 10 0 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Millions of boxes)

Answer 1

a) In this market, the equilibrium price is $25 and equilibrium quantity of oranges is 250 million boxes. The equilibrium is determined where the demand curve and supply curve intersect each other which happens at $25 price and 250 million boxes.

b) At price 35, the quantity demanded is 0 and the quantity supplied is 500 million boxes. Since, quantity supplied is greater than quantity demanded, there will be a downward pressure on price that is the prices will fall so that the excess supply is wiped out.  

At price 15, the quantity demanded is 500 million boxes and quantity supplied is 0. Since, quantity demanded is greater than quantity supplied, there will be an upward pressure on price that is the price will increase so that the excess demand is wiped out.

c) The statement is false. Any price set above the equilibrium price is binding or effective. That is a price ceiling above the equilibrium price or $25 in this case is an effective or binding price ceiling.

d) A binding price ceiling always creates a shortage but the magnitude of the same differs in short run and long run. In short run, the shortage is will become less and less since the producers have no other option but to produce the oranges since they have planted the orange trees, However, in long run the gap between demand and supply will keep on increasing because in long run the producers can decide to change their production.