ECS1501 ASSIGNMENT 03 SEMETER 02

3.1 When a price ceiling is imposed in a market [1] a persistent shortage is created. [2] a persistent surplus is created. [3] sellers of the product are made better off. [4] quantity supplied is greater than the quantity demanded. Explanation: The easiest way to answer this question is to draw a diagram of a market and apply the different options to it. From the diagram one can see that if a price ceiling of R2 500 is imposed, quantity demanded is 18 000 and quantity supplied is 12 000. Quantity demanded is more than quantity supplied, that is a shortage is created. Because sellers cannot raise the price (it would be illegal), they will not produce more and the shortage is therefore persistent. A price ceiling or maximum price sets the maximum price that can be asked for a product. Sellers can ask or the market can establish a price lower than the maximum price, but not higher. Setting the maximum price above the equilibrium price serves no purpose – it will have no effect. Thus, in general when referring to price ceilings the assumption is that it is set below the market price (technically it would be better if the question referred to the imposition of an effective price ceiling). 3.2 The following diagram represents the market for tomatoes. Owing to the pressure of tomato farmers, the government imposes a price floor of R25 per kg on tomatoes. At a price floor R25 per kg [1] households are willing and able to purchase 20 000 kg of tomatoes. [2] an excess demand of 10 000 kg exists. [3] the quantity of tomatoes offered for sale will be the same as the quantity purchased. [4] the quantity of tomatoes offered for sale will be more than the quantity purchased. Explanation: At a price floor of R25 per kg, quantity demanded is 15 000kg while quantity supplied is 25 000. An excess supply of 10 000kg exists. 3.3 In order for a price floor to be effective, it must be set ________ the equilibrium price, while a price ceiling must be set ________ the equilibrium price in order to be effective. [1] above; below [2] above; above [3] below; above [4] below; below Explanation: From question 3.1 we know that a price ceiling must be set below the equilibrium price to be effective. Question 3.2 shows that a price floor must be set above the equilibrium price to be effective. 3.4 Price elasticity of demand gives us a measure of how sensitive or responsive the ________ of a good or service is to a change in the _________ of a good service. [1] price; quantity demanded [2] demand; price [3] quantity demanded; price [4] price; demand Explanation: This question assessed your definition of the price elasticity of demand: “The price elasticity of demand is the percentage change in quantity demanded if the price of the product changes by one percent”. In other words, price elasticity gives an indication how sensitive or responsive quantity demanded is to a change in price. 3.5 If the price elasticity of beef is greater than the price elasticity of coffee, it means that households are [1] more responsive or sensitive to a change in the price of beef than to a change in the price of coffee. [2] more responsive or sensitive to a change in the price of coffee than to a change in the price of beef. [3] more responsive or sensitive to a change in the demand for coffee than to a change in the demand for beef. [4] more responsive or sensitive to a change in the demand for beef than to a change in the demand for coffee. Explanation: If the price elasticity of beef is greater than the price elasticity of coffee, it means that households are more responsive or sensitive to a change in the price of beef than to a change in the price of coffee.