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EC 201, Practice Problems 1. If the government sets a price ceiling on a market that is above the equilibrium price, is the ceiling effective or ineffective? (By “effective” we mean that the floor or ceiling will achieve its intended results.) 2. If the government sets a price ceiling on a market that is below the equilibrium price, is ceiling effective or ineffective? 3. If the government sets a price floor on a market that is above the equilibrium price, is the floor effective or ineffective? 4. If the government sets a price floor on a market that is below the equilibrium price, is the floor effective or ineffective? 5. Explain what typically happens (rises or falls) to price, quantity supplied and quantity demanded when an effective price ceiling is removed from a market? 6. Explain what typically happens to price, quantity supplied and quantity demanded when an effective price floor is imposed on a market? 7. Explain what typically happens to price, quantity supplied and quantity demanded when an effective price floor is removed from a market? 8. Explain what typically happens to price, quantity supplied and quantity demanded when an ineffective price ceiling is imposed on a market? 9. Explain what typically happens to price, quantity supplied and quantity demanded when an ineffective price floor is imposed on a market? 10. Is a usury law a price ceiling or floor? Would it be the borrowers or lenders who would most desire this usury law? 11. Are price supports for agricultural products price floors or price ceilings? Would it be the buyers or sellers who would most desire these price supports? 12. Are minimum wage laws price floors or price ceilings? Would it be the employers or employees who would most desire minimum wages? 13. Are rent control laws price floors or ceilings? Would it be the renter or landowner who would most desire rent controls laws? 14. Referring to the supply and demand schedules below for the market for wheat, find the equilibrium price/bushel and quantity. Tell what would happen to the price, quantity supplied and quantity demanded if the government placed a price floor (agricultural price support) at $9/bushel. What about $10? And what about $6? Supply Schedule Demand Schedule Price Quantity Price Quantity $ 4.00 200 $ 4.00 650 $ 5.00 300 $ 5.00 600 $ 6.00 400 $ 6.00 550 $ 7.00 500 $ 7.00 500 $ 8.00 600 $ 8.00 450 $ 9.00 700 $ 9.00 400 $ 10.00 800 $ 10.00 350 15. Referring to the supply and demand schedules below for the market for gasoline, find the equilibrium price and quantity. Tell what would happen to price, quantity supplied and quantity demanded if the government placed a price ceiling (cap) at $2/gallon. What about $3? And what about $7? Supply Schedule Demand Schedule Price Quantity Price Quantity $ 2.00 50 $ 2.00 250 $ 3.00 100 $ 3.00 200 $ 4.00 150 $ 4.00 150 $ 5.00 200 $ 5.00 100 $ 6.00 250 $ 6.00 75 $ 7.00 300 $ 7.00 50 $ 8.00 350 $ 8.00 25