a)
The question requires us to illustrate the statements with the help of the given figure.
a)
Answer to Problem 3CYU
The opponents and proponents both are correct.
Explanation of Solution
Point E represents the initial market situation where PE is the
When government sets a
Since the quantity supplied is greater than the quantity demanded, the market will have a surplus of gas.
Size of surplus = AB
Here, the opponents and proponents both are correct.
Explanation: Due to an increase in the price, the quantity supplied rises, and the gas owner would sell gas at a higher price and get a profit. So, proponents are correct.
When the price rises above the equilibrium price, the quantity demanded falls because some consumers would prefer not to purchase the product at all. So, the gas station owner will lose customers and thus, opponents are correct.
A price floor is an approach to regulating market price levels. The government always sets a price floor above the equilibrium price so, consumers are willing to buy fewer goods at a price floor because they are getting them at a higher price, while producers are willing to supply more because they are receiving a higher price for their goods, so a price floor leads to a persistent surplus of goods in the market. As a result, there is a surplus (an excess of the product) in the market because the quantity supplied is greater than the quantity demanded.
b)
The question requires us to illustrate the statements with the help of the given figure.
b)
Answer to Problem 3CYU
The opponents and proponents both are correct.
Explanation of Solution
Point E represents the initial market situation where PE is the equilibrium price and QE is the equilibrium quantity in the market.
When government sets a price floor at PF which is higher than the equilibrium price, the quantity demanded contracts from QE to QF, and the quantity supplied expands from QE to QS level.
Since the quantity supplied is greater than the quantity demanded, the market will have a surplus of gas.
Size of surplus = AB
Here, the opponents and proponents both are correct.
Explanation: when the government sets a price floor above the equilibrium price, the producers consider this high price as an incentive to produce high-quality goods. So, the gas station owner will provide better services. Therefore, proponents are correct.
The opponents are correct because when the price rises above the equilibrium price, the quantity demanded falls as some consumers would prefer not to purchase the product.
c)
The question requires us to illustrate the statements with the help of the given figure.
c)
Answer to Problem 3CYU
Proponents are wrong while opponents are correct.
Explanation of Solution
Point E represents the initial market situation where
When government sets a price floor at
Since the quantity supplied is greater than the quantity demanded, the market will have a surplus of gas.
Size of surplus = AB
Here, Proponents are wrong while opponents are correct.
Proponents are wrong as a price floor hurts the consumers and producers both because producers lose their customers as customers will prefer not to buy products at a higher price. So, a price floor is hurting consumers, and up to an extent few producers are hurt by a price floor.
Opponents are correct because a higher price floor incentivizes consumers to buy gas from cheaper sources. A price floor promotes black marketing, bribery, and corruption in the market.
Chapter 8 Solutions
Krugman's Economics For The Ap® Course
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