Page 852 - Krugmans Economics for AP Text Book_Neat

S-6 SOLUTIONS TO AP REVIEW QUESTIONS

3. Price of gas Tackle the Test:
Free-Response Question
S 2.
A B Price of S
P housing
F (rent)
Price
floor
P E
E
Legal limit
E
P E (rent control)
D
Q F Q E
Quantity of gas Shortage
D
a. Some gas station owners will benefit from getting a Q S Q E Q D
Quantity of housing
higher price. Q indicates the sales made by these own-
F
ers. But some will lose; there are those who make sales
at the market equilibrium price of P but do not make Module 9
E
sales at the regulated price of P . These missed sales are
F
indicated on the graph by the fall in the quantity Check Your Understanding
demanded along the demand curve, from point E to 1. a. The price of a ride is $7 since the quantity demanded at
point A. this price is 6 million: $7 is the demand price of 6 million
b. Those who buy gas at the higher price of P will proba-
F rides. This is represented by point A in the accompanying
bly receive better service; this is an example of ineffi- figure.
ciently high quality caused by a price floor as gas station
owners compete on quality rather than price. But oppo-
Fare
nents are correct to claim that consumers are generally (per ride)
worse off—those who buy at P would have been happy A Deadweight S
F
to buy at P , and many who were willing to buy at a $7.00 loss
E
price between P and P are now unwilling to buy. This
F
E
is indicated on the graph by the fall in the quantity
demanded along the demand curve, from point E to 5.00 E
point A.
c. Proponents are wrong because consumers and some gas
station owners are hurt by the price floor, which cre-
ates “missed opportunities”—desirable transactions 3.00 B D
between consumers and station owners that never take
place. The deadweight loss, the net gains forgone
because of missed opportunities, is indicated by the 0 6 8 10 12 14
shaded area in the accompanying figure. Moreover, the Quantity of rides (millions per year)
inefficiency of wasted resources arises as consumers
spend time and money driving to other states. The price b. At 6 million rides, the supply price is $3 per ride, repre-
floor also tempts people to engage in black market sented by point B in the figure. The wedge between the
activity. With the price floor, only Q units are sold. demand price of $7 per ride and the supply price of $3
F
But at prices between P and P , there are drivers who per ride is the quota rent per ride, $4. This is represented
E F
together want to buy more than Q and owners who in the figure above by the vertical distance between
F
are willing to sell to them, a situation likely to lead to points A and B.
illegal activity. c. The quota discourages 4 million mutually beneficial
transactions. The shaded triangle in the figure represents
the deadweight loss.
Tackle the Test: d. At 9 million rides, the demand price is $5.50 per ride,
Multiple-Choice Questions indicated by point C in the accompanying figure, and
1. e the supply price is $4.50 per ride, indicated by point D.
2. b The quota rent is the difference between the demand
price and the supply price: $1. The deadweight loss is
3. e represented by the shaded triangle in the figure. As
4. b you can see, the deadweight loss is smaller when the
quota is set at 9 million rides than when it is set at
5. c 6 million rides.