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Transcript

Tutorial 2

Question 4

Presented by: Kevin Lee Kah Soon

Task 1

a.(i) Explain what type of price control is rent control and when it is binding or not binding.

Answer: Rent control is an example of price ceiling. It is the legal maximum above which an owner of a property cannot charge those who rent their property.

A binding price ceiling is set below the equilibrium price while a non binding price ceiling is set above the equilibrium price.

Task 2

a.(ii) Explain the difference in the effects on market outcomes between the binding and non binding price ceiling.

Answer: A binding price ceiling will have make shortages while a non binding price ceiling will have no effect on the market outcomes.

Task 3

b. The government has decided to increase the taxes to be paid by sellers of a particular product.

Examine the effects of the tax on the following:

(i) price paid by the customers;

(ii) price received by the sellers; and

(iii) Tax burden borne by sellers.

Task 4

(i) Price paid by the customers;

Answer: Price paid by the customers will increase as customers share the tax burden with the sellers.

Task 5

(ii) Price received by the sellers;

Answer: Price received by the sellers will decrease as seller need to share the tax burden for the particular product.

Task 6

(iii) Tax burden borne by the sellers.

Answer: The tax burden will fall more on the seller if demand is elastic or supply is inelastic whereas the tax burden will fall less on the seller if demand is inelastic or supply is elastic.

Task 7

c. Assume that the equilibrium price of a medium low cost apartment in the market is RM85,000. Using appropiate diagrams, illustrate the impact on the equilibrium price and quantity if the government imposes a price ceiling of:

(i) RM 50,000.

(ii) RM 100,000.

Task 8

(i) RM 50000

The government imposes a price ceiling of RM50000. Because the price ceiling is below the equilibrium price of RM85000, the market price equals RM85000. At this price, the Qd>Qs, so there is a shortage.

Task 9

(ii) RM 100000

The government imposes a price ceiling of RM100000. Because the price ceiling is above the equilibrium price of RM85000, the price ceiling have no effect, and the market can reach the equilibrium of demand & supply.

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