Download Price Controls

Fall 2008
Week 6
Government intervention into a market
1. Draw a binding price ceiling in the following market. What makes the price ceiling that you
drew different from a non-binding price ceiling?
2. Draw a binding price floor in the following market. What makes the price floor that you drew
different from a non-binding price floor?
3. The following graph is market for jobs at Wal-Mart (we call this a labor market). In a labor
market, we consider the workers to be the producers, and the employer to be the consumer.
In other words, the supply curve tells us how many people are willing to work at a given price,
and the demand curve tells us how many workers Wal-Mart wants to hire at a given price.
(a) Calculate the consumer, producer, and total surplus for this market.
(b) Now, assume that politicians decide that Wal-Mart isn’t paying their workers enough to
meet the high cost of living in their city. So, the city council votes to impose a minimum
wage of $8 on all employers. This means that no employers can pay workers less than
$8, even if a worker agrees to work for less. Draw in the minimum wage in on the graph
above. Is this a price floor or ceiling? Is it binding?
(c) After the minimum wage is imposed, what is the quantity supplied and quantity demanded? Are we still in equilibrium?
(d) Calculate the new consumer, producer, and total surplus in this market after the minimum
wage is imposed.
(e) What is the resource misallocation? Calculate the dead weight loss.
(f) If you were an economist hired by the city council to advise on the effects of this policy,
what would you tell them?
4. The following graph is the market for apartments in the city of Columbia.
(a) Calculate the consumer, producer, and total surplus for this market.
(b) Now, assume that the city government decide that apartments are too expensive for poor
residents, and so they decide to limit the price that land lords are allowed to charge.
They set the maximum price allowed to charge tenants at $400. Draw the maximum
price on the graph above. Is this a price floor or price ceiling? Is it binding?
(c) After the rent control policy is imposed, what is the quantity supplied and quantity
demanded? Are we still in equilibrium?
(d) Calculate the new consumer, producer, and total surplus in this market after the rent
control is imposed.
(e) What is the resource misallocation? Calculate the dead weight loss.
(f) Do you think that this action by the city council helped poor people in Columbia?