Download 2 - Washington College

ECN 112
PRINCIPLES OF MICROECONOMICS
HOMEWORK 2 (CHAPTER 4) PROBLEMS
DUE: THURSDAY, FEBRUARY 19, 2015
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1. What is “economic efficiency”? Why do economists define efficiency in this way?
2. Suppose that the government sets a binding price floor for milk that is above the competitive
equilibrium price. Also, the government does not purchase any of the surplus milk supply.
(a) Draw a graph showing this situation. Be sure your graph shows the competitive equilibrium
price, the price floor, the quantity that would be sold at the true competitive equilibrium, and the
quantity that is actually sold with the binding price floor. (Note: Since you are not given
specific numbers, just use general notation (i.e., PEq, PFloor, Q1, etc.).
(b) Compare the economic surplus in this market when there is a price floor and when there is
not.
3. 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 S 1 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.
(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.)
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(b) Assume now 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 in this market made better off with the price ceiling than without it? Briefly
explain why you think so.
4. Suppose that you work as an analyst for a manufacturing firm that produces t-shirts in a
perfectly competitive market. An economist who works on your team gives you the following
demand and supply functions for your products:
Demand ≡ QD = 45 – 2P
Supply ≡ QS = –15 + P
For this market, calculate the amount of both consumer surplus and producer surplus.
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