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Question 1 Suppose the government passes legislation to place a 10-cent price ceiling on each roll of toilet paper. Assume the current market equilibrium price for toilet paper is 50 cents per roll....

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Question 1

Suppose the government passes legislation to place a 10-cent price ceiling on each roll of toilet

paper. Assume the current market equilibrium price for toilet paper is 50 cents per roll.

a) Will there be more or less toilet paper for sale? Will the price ceiling cause a surplus or

shortage in the market? Draw a diagram to help you explain the reasons for your answer.

b) Are there ways that firms producing toilet paper can avoid the law to maintain their profits?

c) Is a black market in toilet paper likely to develop as a result of the price ceiling? Would a

black market makes consumers and producers better off, or worse off?

a) Normally there will be less toilet paper to sell because as the price reduces the quantity demanded increase and people want to buy more of the product and it will cause a shortage and there will be less product in the market to sell. The price celling will cause a shortage in the market but as the demand of toilet paper is inelastic there will not be a noticeable change in the quantity demanded.


b) The firm could reduce the cost of production and increase supply to maximize profit.

c)a black market in this situation will increase the quantity of production and it can avoid the shortage and it will be better for the consumers because there will be more toilet papers in the market.

Question 2

Suppose you are working as an economic advisor to the Australian Government. You are asked to

advise the Minister for Health about the best way to reduce rates of cigarette smoking. The Minister

wants to know which policy will be most effective in reducing rates of cigarette smoking: (1) a ban on smoking in public, or (2) higher cigarette taxes.

Comment on how each of these policies might reduce rates of smoking, and whether one policy is more likely to be effective than the other (draw diagrams to help explain your answer). Assume that only one policy can be adopted (in other words, if public smoking is banned, cigarette taxes are unchanged; if cigarette taxes are increased, public smoking is allowed). Note that it is not your job to tell the Minster what they should do – your job is to advise the Minister of the likely consequences of both policy choices.

As the market of cigarettes is inelastic and the raise in the price of cigarettes will not affect the quantity demanded so much, increasing cigarettes taxes will not have a noticeable effect on the demand of cigarettes therefore it will not be the best policy. people who smoke cigarettes does not car much about the price of the cigarettes because most of them are addicted to the product.


when the impose the supply curve shifts to the left and

there will be a new equilibrium and the price and the

price increase but as the market of cigarettes is

inelastic the quantity changes by a small amount and

it will mostly affect the producers rather than

the consumers and it will cause a small deadweight loss

a ban on smoking in public might be a better idea because it could be more effective and it will actually reduce the consumption of cigarettes.

If they set limitations for smokers in public the demand curve will shift to the left and the quantity demanded will be less. therefore, applying a restriction and shifting the demand curve will be more recommended.

Question 3

Consider the following scenarios:

Scenario A: Pizza is produced in slightly higher quantities, with slightly lower prices than in Scenario

B. All pizza is of the same brand, served in similar types of restaurants, with no variation in quality.

Scenario B: Pizza is produced in slightly less quantities, with slightly higher prices than in Scenario A.

Consumers have more variety and choice, with many different types and styles of pizza made at

different restaurants.

a) For each Scenario, identify the type of market structure and comment on the level of

efficiency (Draw diagrams that show levels of output and ATC for each Scenario to help

explain your answer).

b) Which Scenario is likely to make consumers better off? (Explain the reasons for your

answer).

a) Market A is more likely a competition type of market which has a horizontal demand curve and the price is fixed in the market and it equals to marginal cost and there is no deadweight loss. In perfect competition there are number of buyers and sellers and the products offered are homogenous, buyers and sellers have complete information about the prices of products and firm are free to enter and exit

At point A ,the marginal benefit equals marginal cost therefore it will be more efficient to produce at point A only at quantity A is the marginal benefit of an extra unit equal to the marginal cost of an extra unit. In competitive equilibrium p = marginal benefit and p= marginal cost

Market B is a monopolistic competition type of market and the price is more than the marginal cost of production, there is a large number of relatively small firms in the market and the products are differentiated and there is a free entry and exit which applies to large corporations and small businesses

P1 is the point that has the most level of efficiency because the price is more than the marginal cost of production and the minimum of average total cost. p1 is the optimal number of products. The firm must maximize profit by producing where MR = MC

b) People might be happier with scenario A because the price can be less and there is more variation as long as they don’t care much about the quality or any having a specific brand of product.

Answered Same Day May 28, 2021 Monash University

Solution

Alomita answered on May 29 2021
141 Votes
Q1. Suppose the government passes legislation to place a 10-cent price ceiling on each roll of toilet paper. Assume the cu
ent market equili
ium price for toilet paper is 50 cents per roll.
a) Will there be more or less toilet paper for sale? Will the price ceiling cause a surplus or shortage in the market? Draw a diagram to help you explain the reasons for your answer.
) Are there ways that firms producing toilet paper can avoid the law to maintain their profits?
c) Is a black market in toilet paper likely to develop as a result of the price ceiling? Would a black market make consumers and producers better off, or worse off?
ANS :
a. A price ceiling can be defined as the legal maximum price for a good or service set by the legislation. The government passes a legislation that the maximum retail price per toilet roll will be 10 cent , which is below the equili
ium price. So , this price ceiling is a binding price ceiling.
    price
    S
    E
50    
10    price ceiling (binding )
    D
0 Q1 Q Q2 quantity
FIGURE 1 : BINDING PRICE CEILING
The above figure shows the effects of a binding price ceiling on the price of a toilet roll. This price ceiling will cause the sellers to sell less at this price so definitely there will be a shortage of supply of toilet rolls in the market. This shortage will occur because at 10 cent price per roll, the consumers will demand more , Q2 quantity is the present consumer demand after the price ceiling is imposed but, on the contrary, the suppliers are willing to sell on Q1 quantity of roll. The gap between Q1 and Q2 is the supply shortage or excess demand.
. There are certain ways in which the sellers can avoid the law in order to maintain their profit. The most common practice is black marketing and rationing.
c. Black market in toilet paper likely to develop as a result of the binding price ceiling. The producers would be better off if they successfully sell their supplies in black market, at a higher price...
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