Question 1aYes, this will be a binding price ceiling because $300 price is 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 marked as P’ and equilibrium quantity is marked as Q’. The quantity the ten-speed bicycle suppliers are willing to supply (3000) is the same as the price that the demanders are willing to pay which is marked as MB ($700). Since the price the consumer is willing to pay ($700) is higher than the marginal cost ($300), an inefficiency will occur. Consumers are demanding 7000 ten-speed bicycles and suppliers are only willing to supply 3000 ten-speed bicycles when the price is set at $300.
Since the demanded quantity (7000) is higher than the supplied quantity (3000), a shortage of 4000 ten-speed bicycles occurs. There are 4000 bicycles that the suppliers could sell and consumer could buy but this couldn’t happen because of the price is set at $300. Making the supplier not willing to supply that many 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 both consumers and suppliers. Money is lost that benefited no parties. This result in dead-weight lost.
In other words, economic efficiency is lost. For those lucky consumers who manage to buy ten-speed bicycles at a cheaper rate benefited. This resulted in gain in consumer surplus. Ten-speed bicycle suppliers are the biggest loss here since they have the product but unable to sell it at the price they wanted. This resulted in a lost in producer surplus. Question 1bYes, this will be a binding price floor because $700 price is higher than equilibrium price ($500) This will cause the consumer to pay higher prices and this will make some consumer not willing to buy at all.
Similarly, there is again money lose that benefited no parties. When there is a difference between the price the consumer is willing to pay and the equilibrium price, a deadweight welfare loss occurs. When a deadweight welfare happens, it’s a lost to both parties (consumer and producer surplus). Producers ends up losing consumers who are interested in buying ten-speed bicycles but couldn’t afford the high price. Consumers who are interested in the ten-speed bicycles will end up buying a fewer quantity or not buying at all.
Since the price ($700) is higher than what it would be at equilibrium ($500), the suppliers are willing to supply more than the equilibrium quantity (5000). The suppliers will supply their product only when their marginal cost is equal to the price floor. There are 7000 ten-speed bicycles that the suppliers are willing to supply but there is only a demand of 3000 ten-speed bicycles. This cause a surplus of 4000 ten-speed bicycles. For those lucky suppliers who did manage to sell their bicycles at a higher price benefited. This resulted in gain in producer surplus.
Consumers are the biggest lost because either they will have to pay a higher price or choose not to buy at all. As a result, there is a lost in consumer surplus.Question 1cGovernment will impose price ceiling or price floor whenever they think there is a need to do it, when government do impose such law, it will have a clear plan on how to deal with the shortage (if price ceiling) and surplus (if price floor).
Government will usually impose a price ceiling to residential housing when the rents are too high and low-income families can no longer afford it. By enforcing a price ceiling, landlords are not allowed to rent their land above the price ceiling. This will create high demand of housing but low supply and therefore a shortage of housing will occur. This will also result in investors not interested in investing in residential industry because the instability of the market. If this continues, a black market will emerge even though its illegal.
Landlords will ask for higher price under the table. To solve this, government will usually set up a fund and then sign a deal with investors and developers to supply more housing to cope with the demand. Even though this solve the housing shortage issue, in a long-run, the quality of housing will be downgraded because the landlords are not earning as much as they wanted and will not spend that much money on renovation and repair work.Farming industry can be very unstable, the prices of the crops could go down to very low. The farmers will be the hardest hit in this situation because they will earn very little. Government will step in to make sure the prices is reasonable to consumer and the farmers could still earn a living. They will impose a price floor to make sure no farmer could sell their crops below the price floor. As a result, there will be more supply of crops than demand.
This will create a surplus. The government than buys all the surplus from the farmers to ensure the market remain stable and farmers can continue their business. Whenever a government imposes such law, a lot of budget is used to stable the market.Question 2My aunt runs a beauty parlour which specialises in providing Henna design services.
The fixed cost for her shop and equipment is $200.The variable costs are costs of hiring henna artist is $100 per artist.From the table below, marginal gain is the difference in customers after 1 additional artist. Fixed cost which will always remain the same regardless of the number of artist or customers. Variable costs of each level of output is calculated by taking the amount of artist hired and multiplying the salary.Total cost is calculated by adding fixed cost and variable cost.
Marginal Cost is calculated by dividing the difference in total cost after each additional artist with the number of customers. Henna Artist Number of Customers Marginal Gain Fixed Cost Variable Cost Total Cost Marginal Cost Average Fixed Cost Average Variable Cost Average Total Cost1 28 $200 $100 $300 $13.33 $6.
67 $20.002 52 24 $200 $200 $400 $4.17 $5.13 $5.13 $10.263 72 20 $200 $300 $500 $5.00 $3.39 $5.
08 $8.474 84 12 $200 $400 $600 $8.33 $2.
82 $5.63 $8.455 92 8 $200 $500 $700 $12.50 $2.53 $6.33 $8.866 98 6 $200 $600 $800 $16.67 $2.
41 $7.23 $9.64As the number rises from one to two artists, customer increases from 28 to 52, a marginal gain of 24. From that point on, though, the marginal gain in decreases as each additional artist is added. For example, as the number of artist rises from 5 to 4, the marginal gain is only 8; and as the number rises from 6 to 5, the marginal gain is only 6.
Having only 1 artist working, the single artist needs to do everything from greeting customers to administration and cleaning up. Once a second or a third artist joins in, the distribution of workload is more even with allows a greater division of labour. This result in greater increase in marginal returns. But once more artists are added, the advantage of adding each artist is less since the specialisation of labour can only go this far and additional artists will just end up greeting people or just stand-by at the door which will have less impact than the second one did. The diminishing marginal returns. This will cause the total cost of production to increase rapidly. In the line of production, diminishing marginal returns is common when all other factors of production remain the same and an additional staff will make it difficult for other colleagues to work efficiently. The ATC curve is a U-shape because there are increasing marginal 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. By dividing the difference in total cost with the difference in the numbers of customers, you will get the marginal cost.
For example, the cost difference of hiring 2 artists from 1 artist is $400 – $300 = 100, and the difference in customers is 52 – 28 = 24. Marginal cost is 100/24 = $4.17. In other words, the marginal cost is factored into the average total cost per unit. When MC is 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 they cross each other, then MC will continue to climb up and MC will pull ATC along with it after intersection.ReferenceCosts of production Retrieved from Januray 21, 2018, from http://www.economicsonline.co.uk/Business_economics/Costs.htmlPrice Floors and Ceilings Retrieved from Januray 21, 2018, from http://www.econport.org/content/handbook/Equilibrium/Price-Controls.html