Question pay ($700) is higher than the marginal cost

Question 1a

Yes, this will be a binding price ceiling because $300 price
is set lower than the equilibrium price ($500)

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When a $300 price ceiling is set, there is more demand
(7000) than there is at equilibrium price (5000).

By referring to the graph below, equilibrium price is marked
as P’ and equilibrium quantity is marked as Q’. The quantity the ten-speed
bicycle suppliers are willing to supply (3000) is the same as the price that
the demanders are willing to pay which is marked as MB ($700). Since the price
the consumer is willing to pay ($700) is higher than the marginal cost ($300),
an inefficiency will occur.  Consumers
are demanding 7000 ten-speed bicycles and suppliers are only willing to supply
3000 ten-speed bicycles when the price is set at $300. Since the demanded
quantity (7000) is higher than the supplied quantity (3000), a shortage of 4000
ten-speed bicycles occurs.

There are 4000 bicycles
that the suppliers could sell and consumer could buy but this couldn’t happen
because of the price is set at $300. Making the supplier not willing to supply that
many causing the consumer not able buy even if they are willing to pay. 
This will result in 4000 bicycles not supplied or sell causing a lost to both
consumers and suppliers.  Money is lost that benefited no parties. 
This result in dead-weight lost.  For those lucky consumers who manage to
buy ten-speed bicycles at a cheaper rate benefited. This resulted in gain in
consumer surplus. Ten-speed bicycle suppliers are the biggest loss here since
they have the product but unable to sell it at the price they wanted. This
resulted in a lost in producer surplus.

 

Question 1b

Yes, this will be a binding price floor because $700 price is
higher than equilibrium price ($500)

This will cause the consumer
to pay higher prices and this will make some consumer not willing to buy at
all. Similarly, there is again money lose that benefited no parties.  When
there is a difference between the price the marginal demander is willing to pay
and the equilibrium price, a deadweight welfare loss occurs. The deadweight
welfare loss is the loss to both consumer and producer surplus. Producers ends
up losing consumers who are interested in buying but couldn’t afford the high
price.  Consumers who are interested in
the product will end up buying a fewer quantity or not buying at all.

 Since the price ($700) is higher than
what it would be at equilibrium ($500), the suppliers are willing to supply
more than the equilibrium quantity (5000). They will supply where their
marginal cost is equal to the price floor. There are 7000 ten-speed bicycles
that the suppliers are willing to supply but there is only a demand of 3000
ten-speed bicycles. This cause a surplus of 4000 ten-speed bicycles.

For those lucky suppliers
who did manage to sell their bicycles at a higher price benefited. This
resulted in gain in producer surplus. Consumers are the biggest lost
because either they will have to pay a higher price or choose not to buy at
all. As a result, there is a lost in consumer surplus.

Question 1c

Government will impose price ceiling
or price floor whenever they think there is a need to do it, when government do
impose such law, it will of course have a clear plan on how to deal with the
shortage (if price ceiling) and surplus (if price floor).

Government will usually impose a price ceiling to residential housing
when the rents are too high and low-income families can no longer afford it. By
enforcing a price ceiling, landlords are not allowed to rent their housing
above the price ceiling. This will create high demand of housing but less
supply and therefore a shortage of housing will occur. This will also result in
investors not interested in investing in residential industry. If this
continues, a black market will emerge even though its illegal. Landlords will
ask for higher price under the table. To solve this, government will usually
set up a fund that partner with investors and developers to supply more housing
to cope with the demand. Even though this solve the ensure of housing shortage,
in a long-run, the quality of housing will be downgraded too because the
landlords are not earning as much as they wanted and will not spend that much
money on renovation and repair work.

 

Farming industry can be very unstable, the prices of the crops
could go down to very low.  The farmers will be the hardest hit in this
situation because they will earn very little.  Government will step in to
make sure the prices is reasonable to consumer and the farmers could still earn
a living.  They will impose a price floor to make sure no farmer could
sell their crops below the price floor. As a result, there will be more supply of
crops than demand. This will create a surplus. The government than buys
all the surplus from the farmers to ensure the market remain stable and farmers
can continue their business. Whenever a government imposes such law, a lot
of budget is used to stable the market.

 

Question 2

My aunt runs a beauty parlour which specialises in providing
Henna design services.

The fixed cost for her shop and equipment which includes space
rental is $200.

The variable costs are costs of hiring henna artist is $100
per artist.

 The first column
shows the number of henna artist and the second column show the quantity of
customers. The third column shows the marginal gain per artist which is the
difference in customers after 1 additional artist. The fourth column shows the
fixed cost which will always remain the same regardless of the number of artist
or customers. The fifth column shows the variable costs of each level of
output. These are calculated by taking the amount of artist hired and
multiplying the salary.

Total cost is calculated by adding fixed cost and variable
cost.

Henna Artist

Quantity of Customers

Marginal Gain

Fixed Cost

Variable Cost

Total Cost

Marginal Cost

Average Fixed Cost

Average Variable Cost

Average Total Cost

1

28

$200

$100

$300

$13.33

$6.67

$20.00

2

52

24

$200

$200

$400

$4.17

$5.13

$5.13

$10.26

3

72

20

$200

$300

$500

$5.00

$3.39

$5.08

$8.47

4

84

12

$200

$400

$600

$8.33

$2.82

$5.63

$8.45

5

92

8

$200

$500

$700

$12.50

$2.53

$6.33

$8.86

6

98

6

$200

$600

$800

$16.67

$2.41

$7.23

$9.64

 

 

As the number rises from one to two artists, customer
increases from 28 to 52, a marginal gain of 24. From that point on, though, the
marginal gain in decreases as each additional artist is added. For example, as
the number of artist rises from 5 to 4, the marginal gain is only 8; and as the
number rises from 6 to 5, the marginal gain is only 6.

Having only 1 artist working, the single artist needs to do
everything from greeting customers to administration and cleaning up. Once a
second or a third artist joins in, the distribution of workload is more even
with allows a greater division of labour. This result in greater increase in
marginal returns. But once more artists are added, the advantage of adding each
artist is less since the specialisation of labour can only go this far and
additional artists will just end up greeting people at the door will have less
impact than the second one did. The diminishing marginal returns. As a result,
the total cost of production will begin to rise more rapidly as output
increases. This pattern of diminishing marginal returns is common in production.
It occurs because, at a given level of fixed costs, each additional input
contributes less and less to overall production.

 

The ATC curve is a U-shape because there are increasing
marginal costs. At the ATC curve’s minimum point, MC curve intersects the ATC.
This will always be the case if there are increasing marginal costs. Marginal
cost is calculated by dividing the difference in total cost with the difference
in the numbers of customers. For example, the cost difference of hiring 2
artists from 1 artist is $400 – $300 = 100, and the difference in customers is
52 – 28 = 24. Marginal cost is 100/24 = $4.17. In other words, the marginal
cost is factored into the average total cost at every unit. Because of fixed
cost ($200), marginal cost almost always begins below average total cost. When MC
is below ATC, ATC will be decreasing, and when MC is above ATC, ATC will be increasing.
As customer increases, ATC will decrease and MC will increase. Eventually they
intersect, then MC continues to increase and pulls ATC up after it.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reference

Costs of production Retrieved from Januray 21, 2018, from
http://www.economicsonline.co.uk/Business_economics/Costs.html

 

Price Floors and Ceilings Retrieved from Januray 21, 2018, from http://www.econport.org/content/handbook/Equilibrium/Price-Controls.html