Price controls practice Problem 1 – Market for apartments 1. You read in the newspaper that there are only 1.8 million apartments to rent in QS city. Being trained in economics, you know that means there’s a price ceiling. What must the price ceiling be? And why would the government have instituted a price ceiling? 2. Would the price ceiling cause a shortage or a surplus of apartments? Explain with numbers. 3. What would the deadweight loss be as a result of the price ceiling? 4. What are some potential unintended consequences of the price ceiling? 5. Now imagine the city eliminated the price ceiling, as it wasn’t working out (think about answers to #4). But QS city still wants to protect citizens, so it decided to enact a licensing system for landlords that acts like a quota. This is because the government only has resources to inspect 1.9 million apartments, so the government only has 1.9 million certified licenses available. Given this new situation, identify the following: a. The deadweight loss. b. The “wedge” between demand price and supply price c. What does the wedge represent? Problem 2 – Advanced Placement Free Response Question Price
Supply
$5.00 Demand
40,000 Quantity The Toledo arena holds a maximum of 40,000 people, as indicated in the graph above. Each
year the circus holds eight performances, all of which are sold out.
(a)
Analyze the effect on each of the following of the addition of a fantastic new deathdefying trapeze act that increases the demand for tickets.
(i)
The price of tickets
(ii)
The quantity of tickets sold
(b)
The city of Toledo institutes an effective price ceiling on tickets. Explain where the price
ceiling would be set. Explain the impact of the ceiling on each of the following.
(i)
The quantity of tickets demanded
(ii)
The quantity of tickets supplied
(c)
Will everyone who attends the circus pay the ceiling price set by the city of Toledo? Why
or why not?