Question 1aYes, this will be a binding price ceiling because $300 priceis set lower than the equilibrium price ($500)When a $300 price ceiling is set, there is more demand(7000) than there is at equilibrium price (5000). By referring to the graph below, equilibrium price is markedas P’ and equilibrium quantity is marked as Q’. The quantity the ten-speedbicycle suppliers are willing to supply (3000) is the same as the price thatthe demanders are willing to pay which is marked as MB ($700). Since the pricethe consumer is willing to pay ($700) is higher than the marginal cost ($300),an inefficiency will occur.
Consumersare demanding 7000 ten-speed bicycles and suppliers are only willing to supply3000 ten-speed bicycles when the price is set at $300. Since the demandedquantity (7000) is higher than the supplied quantity (3000), a shortage of 4000ten-speed bicycles occurs. There are 4000 bicyclesthat the suppliers could sell and consumer could buy but this couldn’t happenbecause of the price is set at $300. Making the supplier not willing to supply thatmany causing the consumer not able buy even if they are willing to pay. This will result in 4000 bicycles not supplied or sell causing a lost to bothconsumers and suppliers.
Money is lost that benefited no parties. This result in dead-weight lost. For those lucky consumers who manage tobuy ten-speed bicycles at a cheaper rate benefited. This resulted in gain inconsumer surplus.
Ten-speed bicycle suppliers are the biggest loss here sincethey have the product but unable to sell it at the price they wanted. Thisresulted in a lost in producer surplus. Question 1bYes, this will be a binding price floor because $700 price ishigher than equilibrium price ($500)This will cause the consumerto pay higher prices and this will make some consumer not willing to buy atall. Similarly, there is again money lose that benefited no parties. Whenthere is a difference between the price the marginal demander is willing to payand the equilibrium price, a deadweight welfare loss occurs. The deadweightwelfare loss is the loss to both consumer and producer surplus. Producers endsup losing consumers who are interested in buying but couldn’t afford the highprice.
Consumers who are interested inthe product will end up buying a fewer quantity or not buying at all. Since the price ($700) is higher thanwhat it would be at equilibrium ($500), the suppliers are willing to supplymore than the equilibrium quantity (5000). They will supply where theirmarginal cost is equal to the price floor. There are 7000 ten-speed bicyclesthat the suppliers are willing to supply but there is only a demand of 3000ten-speed bicycles. This cause a surplus of 4000 ten-speed bicycles. For those lucky supplierswho did manage to sell their bicycles at a higher price benefited. Thisresulted in gain in producer surplus. Consumers are the biggest lostbecause either they will have to pay a higher price or choose not to buy atall.
As a result, there is a lost in consumer surplus.Question 1cGovernment will impose price ceilingor price floor whenever they think there is a need to do it, when government doimpose such law, it will of course have a clear plan on how to deal with theshortage (if price ceiling) and surplus (if price floor).Government will usually impose a price ceiling to residential housingwhen the rents are too high and low-income families can no longer afford it.
Byenforcing a price ceiling, landlords are not allowed to rent their housingabove the price ceiling. This will create high demand of housing but lesssupply and therefore a shortage of housing will occur. This will also result ininvestors not interested in investing in residential industry.
If thiscontinues, a black market will emerge even though its illegal. Landlords willask for higher price under the table. To solve this, government will usuallyset up a fund that partner with investors and developers to supply more housingto cope with the demand. Even though this solve the ensure of housing shortage,in a long-run, the quality of housing will be downgraded too because thelandlords are not earning as much as they wanted and will not spend that muchmoney on renovation and repair work. Farming industry can be very unstable, the prices of the cropscould go down to very low.
The farmers will be the hardest hit in thissituation because they will earn very little. Government will step in tomake sure the prices is reasonable to consumer and the farmers could still earna living. They will impose a price floor to make sure no farmer couldsell their crops below the price floor. As a result, there will be more supply ofcrops than demand. This will create a surplus. The government than buysall the surplus from the farmers to ensure the market remain stable and farmerscan continue their business. Whenever a government imposes such law, a lotof budget is used to stable the market. Question 2My aunt runs a beauty parlour which specialises in providingHenna design services.
The fixed cost for her shop and equipment which includes spacerental is $200.The variable costs are costs of hiring henna artist is $100per artist. The first columnshows the number of henna artist and the second column show the quantity ofcustomers.
The third column shows the marginal gain per artist which is thedifference in customers after 1 additional artist. The fourth column shows thefixed cost which will always remain the same regardless of the number of artistor customers. The fifth column shows the variable costs of each level ofoutput. These are calculated by taking the amount of artist hired andmultiplying the salary.Total cost is calculated by adding fixed cost and variablecost. Henna Artist Quantity of Customers Marginal Gain Fixed Cost Variable Cost Total Cost Marginal Cost Average Fixed Cost Average Variable Cost Average Total Cost 1 28 $200 $100 $300 $13.33 $6.67 $20.
00 2 52 24 $200 $200 $400 $4.17 $5.13 $5.13 $10.26 3 72 20 $200 $300 $500 $5.00 $3.39 $5.08 $8.
47 4 84 12 $200 $400 $600 $8.33 $2.82 $5.63 $8.45 5 92 8 $200 $500 $700 $12.50 $2.
53 $6.33 $8.86 6 98 6 $200 $600 $800 $16.67 $2.41 $7.23 $9.64 As the number rises from one to two artists, customerincreases from 28 to 52, a marginal gain of 24. From that point on, though, themarginal gain in decreases as each additional artist is added.
For example, asthe number of artist rises from 5 to 4, the marginal gain is only 8; and as thenumber rises from 6 to 5, the marginal gain is only 6.Having only 1 artist working, the single artist needs to doeverything from greeting customers to administration and cleaning up. Once asecond or a third artist joins in, the distribution of workload is more evenwith allows a greater division of labour. This result in greater increase inmarginal returns.
But once more artists are added, the advantage of adding eachartist is less since the specialisation of labour can only go this far andadditional artists will just end up greeting people at the door will have lessimpact than the second one did. The diminishing marginal returns. As a result,the total cost of production will begin to rise more rapidly as outputincreases. This pattern of diminishing marginal returns is common in production.It occurs because, at a given level of fixed costs, each additional inputcontributes less and less to overall production.
The ATC curve is a U-shape because there are increasingmarginal costs. At the ATC curve’s minimum point, MC curve intersects the ATC.This will always be the case if there are increasing marginal costs. Marginalcost is calculated by dividing the difference in total cost with the differencein the numbers of customers. For example, the cost difference of hiring 2artists from 1 artist is $400 – $300 = 100, and the difference in customers is52 – 28 = 24. Marginal cost is 100/24 = $4.
17. In other words, the marginalcost is factored into the average total cost at every unit. Because of fixedcost ($200), marginal cost almost always begins below average total cost. When MCis below ATC, ATC will be decreasing, and when MC is above ATC, ATC will be increasing.As customer increases, ATC will decrease and MC will increase. Eventually theyintersect, then MC continues to increase and pulls ATC up after it.
ReferenceCosts of production Retrieved from Januray 21, 2018, fromhttp://www.economicsonline.co.uk/Business_economics/Costs.html Price Floors and Ceilings Retrieved from Januray 21, 2018, from http://www.econport.org/content/handbook/Equilibrium/Price-Controls.html