Micro-C6&7 Market Intervention

Question 1

What are the effects of an effective price ceiling on:

• price;
• quantity transacted;
• market equilibrium and
• total revenue?

Answer 1

• Price decreases.
• Quantity transacted (Qt) decreases.
• Existence of shortage (excess demand).
• Total revenue must decrease.

Question 2

What are the side-effects of an effective price ceiling?

Answer 2

• As there is shortage, non-price methods (e.g. first-come-first-served, ability, luck, preference, etc.) is required to allocated the good. Therefore, non-price competition occurs among buyers.
• As there is shortage, some buyers are willing to pay a higher price to buy illegaly, resulting in the emergence of a black market.

Question 3

What are the effects of an effective price floor on:

• price;
• quantity transacted;
• market equilibrium and
• total revenue?

Answer 3

• Price increases.
• Quantity transacted (Qt) decreases.
• Existence of surplus (excess supply).
• Total Revenue is uncertain (depending on Ed).

Question 4

What are the side-effects of an effective price floor?

Answer 4

• As there is surplus, non-price methods (e.g. advertisements, product-quality improvement, etc.) is needed to compete for customers. Hence, non-price competition occurs among sellers.
• As there is surplus, some sellers are willing to sell at a lower price illegally, resulting in the emergence of a black market.

Question 5

What are the effects of an effective quota on:

• price;
• quantity transacted and
• total revenue?

Answer 5

Supply decreases, therefore:

• price increases;
• quantity transacted decreases and
• total revenue uncertain (depending on Ed).

Question 6

What is the side-effect on an effective quota?

Answer 6

• Product quality will improve as:
  
  • sellers cannot raise TR by selling more;
  • they need to pay a price to obtain quota right, therefore price of a HQ good relative to the price of a LQ good will decrease, hence r_elatively more HQ good will be consumed_.