Scenario 1: Assume that the government imposed a price ceiling on gasoline in or

Question

Scenario 1: Assume that the government imposed a price ceiling on gasoline in order to prevent prices from getting too high. What are the economic implications of this action in the gasoline markets? Use graphs as needed and explain your answers thoroughly.

Scenario 2: Assume that the government imposed a price floor on wages (minimum wage) in order to make sure that workers can earn a living wage. Is this a price floor? What are the economic implications of this action in the labor markets? Use graphs as needed and explain your answers thoroughly.

Scenario 3: What are the gains and losses of international trade? What happens when tariffs are imposed, in terms of the importing and exporting countries? Use graphs as needed and explain your answers thoroughly.

Scenario 4: If the government doubled the tax on gasoline, would the tax revenues increase or decrease? Why? Use graphs as needed and explain your answers thoroughly.

Required:

Using the scenarios from above, create an 3-6 page paper in APA format. Submit your paper to the W2: Assignment 1 Dropbox by Wednesday, February 27, 2013.

Create a Microsoft PowerPoint presentation for each scenario, summarizing your paper and consisting of at least one slide per scenario.

Explanation / Answer

Scenario1.
A price ceiling is a legal maximum price for a good, service, or resource. [ At the time, the theory was that if the government imposed a price ceiling on food, prices would stop going up and everyone would have the food they wanted at the price they wanted. Of course, this assumes that people do not behave like people. Remember that prices are the result of the equilibrium of supply and demand.
Also remember that these two forces are completely shaped by human nature. The law of demand, which governs consumer behavior, says that as prices fall, consumers have an incentive to buy more, and as prices rise, consumers have an incentive to buy less. The law of supply, which governs producer behavior, says that as prices rise, producers have an incentive to produce more, and as prices fall, producers have an incentive to produce less. What effect does a price ceiling have on the market for food? Look at the incentives. A price ceiling encourages consumers to purchase but discourages producers from producing. Assume that meat is currently selling for $5.00 per pound. Consumers feel that the price is too high, so they petition government for a price ceiling of $3.00 per pound. Representatives, senators, and presidents all like to get re-elected, so they cater to consumers and enact the price ceiling. The $3.00 price signals to consumers to purchase more, but it signals to producers to produce less. The result of the price ceiling is a shortage of meat at the price of $3.00 per pound. At that price, more meat is demanded than is supplied. Consumers got a price ceiling of $3.00, but many consumers did not get any meat. ]


Scenario2.
Assume that the government imposed a price floor on wages (minimum wage) in order to make sure that workers can earn a living wage. [ Is this a price floor? What are the economic implications of this action in the labor markets? National and local governments sometimes implement price controls, which are legal minimum or maximum prices for specific goods or services, in an attempt to manage the
economy by direct intervention. There are two types of price controls: price ceilings and price floors. A price ceiling is the legal maximum price for a good or service, while a price floor is the legal minimum price. Although both a price ceiling and a price floor can be imposed, the government usually only selects either a ceiling or a floor for particular goods or services. When prices are established by a free market, then there is a balance between supply and demand. When the government imposes price controls, then there will be either excess supply or excess demand, since the legal price is often very different from the market price. Indeed, the government imposes price controls for the very reason that it is not satisfied with the market price. A price ceiling creates a shortage when the legal price is below the market equilibrium price, but has no effect on the quantity supplied if the legal price is above the market equilibrium price. A price ceiling that is below the market equilibrium price creates a shortage that causes consumers to compete vigorously for the limited supply. Supply is limited because suppliers are not getting the prices that would allow them to earn a profit. Likewise, since supply is proportional to price, a price floor creates excess supply if the legal price is above the market price. Suppliers are willing to supply more at the price floor than the market wants at that price. ]

Scenario3.
One of the gains and losses that I can think of is the Forex gains and losses. The exchange rates vary from time to time. This leads to gains and losses depending on the strength of a currency. [ This is applicable to International trade because there is no universal currency, that is why if you will transact with other countries, you will have to incur FOREX gains or losses. If tariffs will be imposed, it is possible that the demand would decrease as tariffs are extra charges, meaning an additional cost. ]

Scenario4.
Other things being equal, if the government doubled the tax, tax revenues would increase. But of course, this is just theoretically true. As gasoline taxes would increase, the quantity demanded MIGHT decrease. [ So, in reality, the first statement is not absolutely true. ]

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