Suppose the equilibrium price of potatoes is $5 per pound, but the government imposes a price...
Suppose the equilibrium price of potatoes is $5 per pound, but the government imposes a price ceiling of $2 per pound, creating a deadweight loss. True or False: If the government imposes a sales tax of $1 per pound of potatoes (while continuing to maintain the price ceiling), then the deadweight loss will get even larger.
Homework Answers
Ans) Price ceiling is the legal maximum price that can be charged for any product. It reduces producer surplus and increases consumer surplus. It also creates deadweightloss i.e loss in efficiency.
When sales tax is imposed with price ceiling, there is no additional deadweightloss. The deadweightloss created by tax will be adjusted in deadweightloss created by price ceiling.
1) False.
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Suppose the equilibrium price of potatoes is $5 per pound, but
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