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ECN 111
PRINCIPLES OF MACROECONOMICS
CHAPTER 4 PRACTICE PROBLEMS
This is NOT a homework assignment.
It is just practice to help you become familiar with the Chapter 4 material.
There is no homework for Chapter 4, but this material will be on Midterm I.
1.
(a) Suppose that you—as a consumer—would have been willing to pay $10 for a
pizza, but you only had to pay $8. What does the difference between $10 and $8
represent? In addition to giving the proper name for this, also be sure to formally
define what this concept is.
(b) Now suppose that you are the producer (the supplier). If you are willing to
sell a unit of output at its marginal cost of $15, but you actually get to sell it at the
market price of $20, then what does the $5 difference represent? In addition to
giving the proper name for this, also be sure to formally define what the concept
is.
2.
(a) Which causes a shortage of a good: a binding price ceiling or a binding price
floor?
(b) Which causes a surplus of a good: a binding price ceiling or a binding price
floor?
3.
Explain why economists usually oppose government controls on prices.
4.
Use the graph below to answer this question. Suppose that initially the gasoline
market is in equilibrium, at an equilibrium price of P* = $2.00 per gallon and an
equilibrium quantity of Q* = 45 million gallons per month. (This is the
intersection of the demand curve and the S1 supply curve.) Then a war in the
Middle East disrupts imports of oil into the United States, shifting the supply
curve for gasoline from S1 to S2. The price of gasoline begins to rise, and the
voters complain. The federal government responds by setting a binding price
ceiling of $2.00 per gallon.
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(a) If there were no price ceiling, what would be the equilibrium price of
gasoline, the quantity of gasoline demanded, and the quantity of gasoline
supplied? (Make sure you analyze the market using the new supply curve,
S2.)
(b) Assume that the binding price ceiling is imposed. What are the price of
gasoline, the quantity of gasoline demanded, and the quantity of gasoline
supplied? How large is the shortage of gasoline? (Make sure you analyze the
market using the new supply curve, S2.)
(c) If the binding price ceiling is imposed, show on the graph the areas that
represent consumer surplus, producer surplus, and deadweight loss.
(d) Are consumers made better off with the price ceiling than without it? Briefly
explain why you think so.
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