Effects of Government Intervention

Part 1 - Price Controls​-​ ​Suppose a government institutes a binding price ceiling for cell phones. ​Show
the result using a demand and supply graph and answer the following questions.

D S
1. What will happen to the price, quantity demanded and quantity
supplied of cell phones?
During a price ceiling, the price would decrease. The quantity demanded would increase
and the quantity supply will decrease.
2. Does the ceiling create a shortage or surplus? How can you tell?
A price ceiling creates shortage. As shown on the graph, Shortages also occurs when prices are below
the equilibrium price. Furthermore, the quantity demanded is higher than a quantity supplied.
P
3. Who benefits from the price ceiling? Explain.
P1 Price ceiling benefits consumers. As price ceiling prevents sellers from overcharging high
Shortage prices. This ensures an affordable price so that everyone could afford cell phones.

4. Who is harmed by the price ceiling? Explain.

S D Sellers are harmed by price ceiling. As price ceiling prevent over charging.
This prevents sellers from setting up high prices in order to earn profit.
Qs Qd

Part 2 - Practice​- ​The government of Paulaville decides to set prices of wheat. Use the information in
the chart to answer the questions.
5. Calculate the amount of the shortage or surplus if the
government sets a price floor at $2.
There are no changes
6. Calculate the amount of the shortage or surplus if the
government sets a price floor at $10.
160-50= 110
7. Calculate the amount of the shortage or surplus if the
government sets a price ceiling at $10.
no effect
8. Calculate the amount of the shortage or surplus if the
government sets a price ceiling at $1.
350-100= 250

Part 3 - Stretch Your Thinking​- ​Answer the questions.

9. Assume the government of Paulaville establishes a price floor for wheat at $10 and agrees to purchase
any excess wheat that consumers don’t buy. Calculate the amount of the shortage or surplus at the
price floor of $10. Explain your answer.
Price floor usually causes surplus due to a low demand and a high
160-50= 110
supply. A higher quantity demanded and lower quantity supplied.

10. Identify one reason why the government might implement a price floor on wheat even though
economists generally agree that it would result in a less efficient market?
Perhaps due to harsh climate farmers are unable to supply wheat at a given demand. Therefore, with a
higher price ,demand would decrease and farmer could increase their supply.
Effects of Government Intervention
Part 4 - Making Connections​- ​Use the graph to
identify the transaction quantity (Q) and the areas
of consumer surplus (CS), producer surplus (PS),
and deadweight loss (DWL) under the different
V +L + X
scenarios. Assume that Q3​ ​ is the socially optimal Q4-
+M+Q+ K+O+F
output. Q2
S+Z Y+N

L+M+
Q4-
V+ Z + S N+ K + O
Q2 0
+Q+X +F

Q1 Q+ X+ M
S+Q+V
Z + O + Y+
+X+Y
N

V+X+ V+ X + L
Q4-
S+Q+ +M+K+ Y+N
Q2
Z O+F

Part 5 - More Practice-​ ​Assume that a price floor is imposed at $40. Use the graph below to answer the
questions. Show your work.
15. How much is the total consumer surplus with
the price floor?
1/2 x (50-40) x 2=10
16. How much is the total producer surplus with
the price floor?
(40-20) x 2 + 1/2 x (20-10) x 2= 50
17. How much is the deadweight loss with the
price floor?
1/2 x (30-20) x 2 + 1/2 x (40-30) x 2= 20
18. Assume instead that a price ceiling is
imposed at $25. How much is the total
consumer surplus with the price ceiling?
(40-25) x 2 +1/2 x ( 50-40) x 2= 40
19. How much is the total producer surplus with
a price ceiling at $25?
(25-20) x 2 +1/2 x ( 20-10) x 2= 20
20. How much is the deadweight loss with a
price ceiling at $25? Qs Q Qd
0