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Question 1

In 2014, a major ice storm hit the southeastern U.S. The storm brought down power lines and trees, cutting electricity in many areas, making travel difficult, and slowing down repair crews. Heating homes became a major challenge. The storm created shortages of power generators. As a result, those products sold at prices much higher than normal. These high prices provoked cries of "price gouging" and calls on the government to impose price controls to prevent gouging. While no one likes to pay a higher price than normal for something, consider what would have happened with a price ceiling. The economic intuition is revealing.

1. Draw a diagram showing the market for generators with an equilibrium price at $250. Think about the relative elasticity of supply and demand when you sketch your curves. Which one should be flatter?

1. Now impose a price ceiling at $200 per generator. Show the impact of the price ceiling on the quantity demanded on your graph. Do the same for the impact on the quantity supplied.

1. Discuss who would benefit from the price ceiling and who would be harmed? Let the graph guide your thinking. Don't start with your gut reaction. Did the price ceiling help the people it was designed to help? Explain the economic reasoning behind your analysis.

Question 2

Assume the country of Vegilove wants to support farmers by instituting price supports (price floors) for all organically grown vegetables.

1. Draw a diagram representing the market for organic broccoli in Vegilove in which the market equilibrium price is $3 and the price floor is set at $4. Make sure to label the demand curve, supply curve, equilibrium price, price floor, quantity supplied, quantity demanded, and the resulting shortage/surplus.

1. Explain why the shortage/surplus is created in your graph and what we'd see that illustrates any resulting deadweight loss. In other words, how would we know there is deadweight loss in the market?