Government intervention - Price controls and Minimum wages

A government may set a legal maximum price for a particular good; this is called a price _______. It means that the price that can be legally charged by sellers of the good must not be ________ than the legal maximum price

• floor; lower

• ceiling; lower

• floor; higher

• ceiling; higher

The price ceiling, Pc, is set by the government at a level below the equilibrium price. This has the following effects on market outcomes:

• a price ceiling results in a lower quantity supplied and sold than at the equilibrium price.

• a price ceiling leads to price rationing

• a price ceiling leads underallocation of resources and allocative inefficiency

• the government budget will not be affected

• a price ceiling leads to increased producer surplus

HL: What is the change in consumer expenditure after the price ceiling?

• £ 45,000

• £ 135,000

• £ 160,000

• £ 115,000

(Multiple answers) Governments use to support farmers’incomes is to set price floors for certain agricultural products, the objective being to raise the price above their equilibrium market price; such price floors are called price supports. A price floor does not allow the market to clear; it results in disequilibrium where there is a surplus (excess supply). A common practice is for the government to buy the excess supply, and this causes the demand curve for the product to shift to the right to the new demand curve ‘D plus government purchases’. By buying up the excess supply, the government is able to maintain the price floor at Pf. What are the effects on the market outcomes?

• too many resources are allocated towards the production of the good

• producers are better off

• since Qs > Qe, MB < MC, society is getting too much of the good

• since Qs < Qe, MB > MC, society is getting too much of the good

• a global misallocation of resources

HL: What is the change in producer revenue per week after the introduction of the price floor?

• £ 200,000

• £ 800,000

• £ 1,000,000

• £ 1,200,000

• £ 2,000,000

Supply and demand determine the equilibrium ‘price’ of labour, which is the wage, We, where the quantity of labour demanded is equal to the quantity of labour supplied, Qe. The minimum wage, Wm, lies ________ the equilibrium wage, We. Therefore, at Wm, the quantity of labour _________ is larger than the quantity of labour ________ when the labour market is in equilibrium (Qe). The quantity of labour ___________ is less than the quantity ___________at equilibrium, Qe. So a surplus of labour in the market occurs.

• above; supplied; demanded; demanded; supplied

• above; supplied; demanded; supplied; demanded

• above; supplied; supplied; demanded; demanded

• None of the above as it leads to unemployment

Consequences of minimum wages for the various stakeholders are:

• firms are better off since they get cheap labour

• some workers win, some workers lose

• society is worse off due to an underallocation of labour supply

• consumers are negatively affected due to a decrease in supply of products

• firms are worse off since they face increased cost of production