In 2011 the government of Israel decided to abandon price supervision of cottage cheese. As a...
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In 2011 the government of Israel decided to abandon price supervision of cottage cheese. As a result, the price of cottage cheese jumped, causing public protests and widespread riots against the government. After public pressure, the government reinstated a price ceiling on cottage cheese. a) Assume the demand for cottage cheese is a downward sloping line (that is, as price increases the quantity demanded of cottage cheese decreases holding everything else constant), and the supply of cottage cheese is an upward sloping line (that is, as price increases the quantity | supplied of cottage cheese increases holding everything else constant). Plot the demand and supply curves for cottage cheese in a graph measuring the quantity of cottage cheese on the horizontal axis and the price of cottage cheese on the vertical axis. Mark the equilibrium price in this market (assume it is a competitive market) as P₁ and the equilibrium quantity in this market as Q₁. On the same graph, indicate how a price ceiling would change the quantities demanded and supplied and the prices consumers and producers face. Mark the price ceiling price as P2 and the price ceiling quantity as Q2. b) What are the changes in consumer surplus, producer surplus and total welfare (in this example, total welfare = consumer surplus + producer surplus)? c) Assume that the demand for cottage cheese is given by the equation: P = 10-10 where P is the price of cottage cheese measured in dollars and Q is the quantity demanded of cartons of cottage cheese. The supply is given by the equation: 3 P ==Q+2 10 The government's price ceiling is set at P = $3.50 per carton of cottage cheese. Plot the demand and supply for cottage cheese. Indicate clearly the point of competitive equilibrium and the points of consumption and production with the price ceiling. What are the price and quantity in the competitive equilibrium? What are the prices and quantities with a price ceiling? d) Calculate the consumer surplus, producer surplus, and deadweight loss. Who is better off due to the price ceiling and who is worst off, and why? What is the change in social welfare (consumers and producers) after the price ceiling is established and why? Here is a table where you can organize your answers to these questions. Consumer Surplus Producer Surplus Deadweight Loss Social Welfare Before price ceiling After price ceiling Change e) In an attempt to increase competition in the dairy market, the government lifts restrictions on the import of dairy goods. However, this hurts local farmers, who have a strong lobby. In order to help farmers, the government decides to set a price floor at P = $7 per carton of cottage cheese. Disregarding any changes described in the previous questions, repeat parts (c) and (d) with the price floor instead of price ceiling. Assume the demand and supply curves are given by the above equations. Here is a table where you can put some of the required answers for this question. Note that there are more questions to answer then are summarized in this table! After price floor Change Consumer Surplus Producer Surplus Deadweight Loss Social Welfare Before price floor In 2011 the government of Israel decided to abandon price supervision of cottage cheese. As a result, the price of cottage cheese jumped, causing public protests and widespread riots against the government. After public pressure, the government reinstated a price ceiling on cottage cheese. a) Assume the demand for cottage cheese is a downward sloping line (that is, as price increases the quantity demanded of cottage cheese decreases holding everything else constant), and the supply of cottage cheese is an upward sloping line (that is, as price increases the quantity | supplied of cottage cheese increases holding everything else constant). Plot the demand and supply curves for cottage cheese in a graph measuring the quantity of cottage cheese on the horizontal axis and the price of cottage cheese on the vertical axis. Mark the equilibrium price in this market (assume it is a competitive market) as P₁ and the equilibrium quantity in this market as Q₁. On the same graph, indicate how a price ceiling would change the quantities demanded and supplied and the prices consumers and producers face. Mark the price ceiling price as P2 and the price ceiling quantity as Q2. b) What are the changes in consumer surplus, producer surplus and total welfare (in this example, total welfare = consumer surplus + producer surplus)? c) Assume that the demand for cottage cheese is given by the equation: P = 10-10 where P is the price of cottage cheese measured in dollars and Q is the quantity demanded of cartons of cottage cheese. The supply is given by the equation: 3 P ==Q+2 10 The government's price ceiling is set at P = $3.50 per carton of cottage cheese. Plot the demand and supply for cottage cheese. Indicate clearly the point of competitive equilibrium and the points of consumption and production with the price ceiling. What are the price and quantity in the competitive equilibrium? What are the prices and quantities with a price ceiling? d) Calculate the consumer surplus, producer surplus, and deadweight loss. Who is better off due to the price ceiling and who is worst off, and why? What is the change in social welfare (consumers and producers) after the price ceiling is established and why? Here is a table where you can organize your answers to these questions. Consumer Surplus Producer Surplus Deadweight Loss Social Welfare Before price ceiling After price ceiling Change e) In an attempt to increase competition in the dairy market, the government lifts restrictions on the import of dairy goods. However, this hurts local farmers, who have a strong lobby. In order to help farmers, the government decides to set a price floor at P = $7 per carton of cottage cheese. Disregarding any changes described in the previous questions, repeat parts (c) and (d) with the price floor instead of price ceiling. Assume the demand and supply curves are given by the above equations. Here is a table where you can put some of the required answers for this question. Note that there are more questions to answer then are summarized in this table! After price floor Change Consumer Surplus Producer Surplus Deadweight Loss Social Welfare Before price floor
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