Price Ceiling and Price Floor

1990-1-b-i
Since the minimum wage of Filipino maids is above the equilibrium price level, a
further increase of it will increase the excess supply for Filipino maids. If demand is
elastic, the percentage increase in price will be less than the percentage decrease in
quantity demanded. As a result, the total income gain is less than the total income loss
so that the total wage earning of Filipino maids will decrease.

Wage ($) >

Loss in TI > Gain in TI

W2
W1 S
D

0 Quantity
Q2 Q1
1991-2-b
Unit Price
S
= additional revenue
Po = present price
Pe = equilibrium price
Pe

Po
D

0 Quantity
Q2 Q1
(i) According to the law of demand, the quantity demanded decreases from Q1 to Q2
as price rises.

(ii) The total revenue increases because the fee is raised while the quantity remains
unchanged.
1994-3
The market price is P0 and the quantity transacted is Q0.

2006-1
Unit Price
S

PA
Pe E
Decreased in total
Expenditure PB E’
D
0 Quantity
QB Qe
(a) No because PA is above the equilibrium price.
(b) Price decreased from Pe to PB and quantity transacted decreased from Qe to QB.
The total expenditure of consumers decreases from 0PeEQe to 0PBE’QB.

2011-3
(a)

Not effective because

Wc is below the equilibrium wage rate WE.
 (b) No change, because
(ineffective price control) results in no change in both W and Q.

[Shading of area 0WEEQE/ indicating the area in Figure 1]

DSE-2013-II-10-c
Verbal elaboration:
An effective price floor will create a surplus of workers. If the restaurant workers
change to work in other industries (for example, turn into security guards) the supply
of workers in this industry drops, there may be a shortage for workers at the minimum
wage rate.

Indicate on the diagram:

- wage rate set above the original equilibrium
- surplus
- magnitude of the leftward shift of the supply curve greater than the surplus
- final shortage
DSE-2018-II-10

(d) Filipino maids working in the Mainland and Filipino domestic helpers in Hong
Kong are in competitive supply.
The supply of foreign domestic helpers in Hong Kong will sharply decrease and
even at a higher wage rate there would be a shortage.

Illustrate in Figure 2:
– Leftward shift of supply curve
– Correct position of shortage at the higher wage rate

(e) Possible phenomena:

– Employers may try to recruit domestic helpers from other countries to work in
Hong Kong.
– The minimum wage may be raised / abolished by the government.
Remark: More people may quit their jobs and take care of their children /
elderly full time.
Quota

1990-4-c
(i) No. Alternatively Mr. Lee can sell these quotas in the market and make money.
The opportunity cost is the sum of money thus forsaken.

(ii) The quality of Hong Kong’s garment exports to the U.S.A. will be improved. It
is because quota only limits the amount of exports while exports of better-quality
can be sold at higher prices for higher profits.
(iii)
(I) A fall in garment production costs in Hong Kong will increase the profit margin
of garment exporters. The demand for quota in Hong Kong will increase. The
equilibrium quota price will increase. Therefore, the existing quota holders will
only release more quotas at a higher price.

(II) A fall in garment production costs in the U.S.A. will increase the supply of US-
produced garments. The price of US-produced garments will decrease. US
garment and HK garment are substitutes. Therefore, the demand for HK garment
will decrease. It will cause a decrease in demand for quota in Hong Kong. Quota
price will decrease.
1997-10-b
Price ($)
SQ

P2 S1
P1
B

A D
0 Quantity
Quota Q2 Q1

For an effective quota, the quota quantity is smaller than the initial equilibrium
quantity, supply curve would be rotated from A S1 to AB SQ.
The market price would be increased from P1 to P2.
Finally, the import volume would be decreased from Q1 to Q2.
1998-2

Price ($) Original New

Quota Quota
S1 S2

P1 S0
P2

D
0 Quantity
Q1 Q2
If government increases the quota, the supply of import will increase from S1 to S2.
The market price of the import will decrease from P1 to P2.

2001-9-b
Price ($) New Original
Quota Quota <
S2 S1
Increase in < Decrease in
P2 S0 total expenditure total expenditure

P1

D
0 Quantity
Q2 Q1
As the importing economy reduces the effective quota, the supply of imported
garment will be decreased from S1 to S2. The quantity transacted will decrease from
Q1 to Q2 and the equilibrium price will increase from P1 to P2. If the demand for
imported garment is elastic, the percentage decrease in quantity will be more than the
percentage increase in price. Total expenditure will decrease.
2008-11-b
There was quality improvement in Hong Kong-made garments. After imposing the
import quota restriction, the US imported more higher-priced Hong Kong-made
garments, (replacing those lower-priced Hong Kong-made garments that were
subjects to quota restriction).

DSE-2012-5-a
No, because
- there is excess demand/ shortage.
- other competitive criteria/non-price competition, such as queuing, will emerge.
- the new competitive criteria do not necessarily depend on income.

DSE-2013-10-c
Verbal elaboration:
An effective price floor will create a surplus of workers. If the restaurant workers
change to work in other industries (for example, turn into security guards) the supply
of workers in this industry drops, there may be a shortage for workers at the minimum
wage rate.

Indicate on the diagram:

- wage rate set above the original equilibrium
- surplus
- magnitude of the leftward shift of the supply curve greater than the surplus
- final shortage