How prices allocate resources

How prices allocate resources

Suppose that there are three beachfront parcels of land available for sale in Asilomar, and six people who would each like to purchase one parcel. Assume that the parcels are essentially identical and that the minimum selling price of each is $445,000. The following table states each person’s willingness and ability to purchase a parcel.

 

Willingness and Ability to Purchase

 

(Dollars)

 

Hubert

600,000

 

Kate

510,000

 

Manuel

470,000

 

Poornima

420,000

 

Shen

390,000

 

Valerie

380,000

Which of these people will buy one of the three beachfront parcels? Check all that apply.

 

Hubert

 

 

 

 

 

Assume that the three beachfront parcels are sold to the people that you indicated in the previous section. Suppose that a few days after the last of those beachfront parcels is sold, another essentially identical beachfront parcel becomes available for sale at a minimum price of $432,500. This fourth parcel be sold because will purchase it from the seller for at least the minimum price.

(2)Price controls in the Florida orange market

The following graph shows the annual market for Florida oranges, which are sold in units of 90-pound boxes.

Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

Created with Raphaël 2.1.2

0

90

180

270

360

450

540

630

720

810

900

50

45

40

35

30

25

20

15

10

5

0

PRICE (Dollars per box)

QUANTITY (Millions of boxes)

Demand

Supply

Graph Input Tool

 

Market for Florida Oranges

 

15

 

900

378

 

Price

(Dollars per box)

 

Quantity Demanded

(Millions of boxes)

 

Quantity Supplied

(Millions of boxes)

In this market, the equilibrium price is$per box, and the equilibrium quantity of oranges ismillion boxes.

For each price listed in the following table, determine the quantity of oranges demanded, the quantity of oranges supplied, and the direction of pressure exerted on prices in the absence of any price controls.

 

Price

Quantity Demanded

Quantity Supplied

Pressure on Prices

 

(Dollars per box)

(Millions of boxes)

(Millions of boxes)

 

20

 

30

True or False: A price ceiling below $25 per box is not a binding price ceiling in this market. (Economists call a price ceiling that prevents the market from reaching equilibrium a binding price ceiling.)

 

True

 

(4)The effects of rent control

Suppose the following graph shows the demand for, and supply of, apartments in New York City.

Use the black point (plus symbol) to indicate the equilibrium monthly rent and quantity of apartments in the absence of price controls. Then use the green point (triangle symbol) to fill the area representing consumers’ surplus, and use the purple point (diamond symbol) to fill the area representing producers’ surplus.

Created with Raphaël 2.1.2

Equilibrium

CS

PS

0

0.8

1.6

2.4

3.2

4.0

2600

2400

2200

2000

1800

1600

MONTHLY RENT (Dollars per apartment)

QUANTITY OF APARTMENTS (Millions per month)

Demand

Supply

Suppose that the government decides to impose a rent control of $1,900 per month on rental apartments in New York City. On the following graph, use the green point (triangle symbol) to shade the area representing consumers’ surplus in the presence of rent control. Use the purple point (diamond symbol) to shade the area representing producers’ surplus after the rent control. Then use the grey point (star symbol) to shade the area representing deadweight loss resulting from the rent control.

Created with Raphaël 2.1.2

CS w/ Rent Control

PS w/ Rent Control

Deadweight Loss

0

0.8

1.6

2.4

3.2

4.0

2600

2400

2200

2000

1800

1600

MONTHLY RENT (Dollars per apartment)

QUANTITY OF APARTMENTS (Millions per month)