Practice Questions #3
Principles of Microeconomics
Professor Hungerman
1. What happens to equilibrium supply and demand if a price floor is set below the
equilibrium price?
Nothing happens. Since the floor is below equilibrium, the market is still able to
determine the quantity and price the same way it always does.
2. What happens to producer surplus when a price ceiling (below the equilibrium price)
is enacted? What happens to consumer surplus? Will there be a shortage or a surplus in
the new equilibrium?
Producer surplus unambiguously falls. The change in consumer surplus is ambiguous—
on the one hand, some consumers don’t get to purchase the good anymore and this makes
CS fall. But on the other hand those who still get the good pay even less for it, and this
makes consumer surplus rise. There will be a shortage at the new equilibirium.
3. Suppose the minimum wage was lowered, and consider a labor market (so the “price”
is the wage workers get paid) where the both the new and the old minimum wage act as a
price floors above equilibrium price. Draw a graph of the labor market before and after
the policy change. Illustrate how unemployment will change as a result of policy. What
happens to consumer surplus? What happens to deadweight loss?
