Microeconomics Assignment #2

Question #1

a). Given the table, graph the demand and supply curves. Make certain to label the equilibrium price and
equilibrium quantity.

Price Qd Qs
$100 9500 1500
$200 8500 2500
$300 7500 3500
$400 6500 4500
$500 5500 5500
$600 4500 6500
$700 3500 7500
$800 2500 8500
$900 1500 9500

$1,000

$900
Price
Equilibrium

$800

$700

$600 Equilibrium
Price

$500 Equilibrium Price:

$500
$400
Equilibrium Quantity:
$300
5500
$200

$100

$0
1000 2000 3000 4000 5000 6000 7000 8000 9000 10000

Quantity

Equilibrium Quantity
 b). Using the graph, what is the effect a $200 price ceiling would have on the market? Would this be a
binding price ceiling?

$1,000

$900

$800

$700
Equilibrium
Price: $500 $600
Equilibrium
Price

$500
Quantity: 5500
$400

$300

$200 Price Ceiling

$100

$0 Shortage
1000 2000 3000 4000 5000 6000 7000 8000 9000 10000
Quantity

If there was a $200 price ceiling, the quantity supplied would be 8500 and the quantity demanded would
be 2500, causing a shortage of 6000 units (price ceiling below equilibrium). The price ceiling would be
binding, meaning the market price equals the price ceiling.

c). Using the graph, what is the effect an $800 price floor would have on the market? Would this be a
binding price floor?

$1,000 Surplus
$900

$800 Price Floor

$700
Equilibrium
Price: $500 $600
Price

Equilibrium $500
Quantity: 5500 $400

$300

$200

$100

$0
1000 2000 3000 4000 5000 6000 7000 8000 9000 10000
Quantity
 If there was an $800 price floor, the quantity supplied would be 8500 and the quantity demanded would
be 2500, causing a surplus of 6000 units (price floor above equilibrium). The price floor would be a
binding constraint on the market, meaning the market price equals the price floor.

d). The Government would choose to impose a price ceiling when they don’t want a price to rise above a
certain level or maximum. Price ceilings can act as an attempt to keep prices of a certain product or
service low for those demanding it and are usually implemented to assist vulnerable buyers.

The Government would choose to impose a price floor when they don’t want a price to drop below a
certain level or minimum. Price floors are usually set above the equilibrium, but price floors can also be
set below the equilibrium to act as a ‘preventative measure’ incase prices unexpectedly drop.

Question #2

a). Show a labour market with a binding minimum wage in a supply-demand diagram.

b). Unemployed

At Disadvantage

Minimum
Wage

Equilibrium
Wage
Wage

Quantity of Labour
b). Employed

Has Advantage
Unemployed due Unemployed due
to minimum wage to lack of work
 Question #3

Using supply and demand diagrams, explain briefly how does elasticity affect the burden of tax?

When Supply is Inelastic and Demand is Elastic:

Price

Price Buyers
pay after tax
Tax

Burden of Tax
on Buyers
Equilibrium

Burden
of Tax on
Price Sellers Sellers
receive after tax

Quantity
 When Demand is Inelastic, and Supply is Elastic:

Price

Price Buyers
pay after tax Tax

Burden of
Tax on
Buyers

Burden
of Tax on
Sellers

Price Sellers
receive after tax
Quantity

Buyers and sellers will always share the burden of tax, but it depends on the elasticity of the demand
and supply curves as to who holds more of a burden. As shown above, when the demand curve is more
elastic, sellers hold more of a burden than buyers do. When the supply curve is more elastic, buyers hold
more of a burden than sellers do.