Question

Suppose that, to make bread affordable for low-income consumers, the government imposes a price ceiling on bread. 

a. In the graph below, adjust the price line to show a binding price ceiling. 

b. Which of the following are potential consequences of a price ceiling on bread? 

a decline in the quality of bread 

a decrease in the opportunity cost of searching for bread 

the development of a black market in bread 

a shortage of bread

Answer 1

a.

A binding price ceiling is the one which is less than the equilibrium price, so that it helps consumers to get goods at low price

b. Option 1,2,3 and 4. All of them are potential consequences as at low price, the suppliers might lose motivation to supply high quality goods, because of low price, the demand increase which leads to shortage also leading to black market at higher prices