Question

The mayor of Stockville is seeking reelection and isn’t buying into the health food hype. He believes that french fries are necessary for the happiness of his citizens, but the fast-food restaurants in his city are charging too much for their products. In an effort to shore up election support, the mayor institutes a price ceiling on french fries. Within two years, half of the fast-food restaurants close in Stockville. What is the likely cause?

A neighboring town is subsidizing french fry producers.

The price ceiling generated long-run economic losses.

A spike in french fry consumption resulted in a long-run decline in health, drastically reducing demand for fast food.

A french fry price ceiling without a proportional hamburger price floor created an untenable production balance.

The price ceiling generated long-run economic profits.

Answer 1

The likely cause for the shutdown of half of the fast food restaurants in Stockville is that a spike in french fry consumption resulted in a long run decline in health, drastically reducing demand for fast food. We can say this because when the price ceiling is implied on the french fries , the price of the french fries go down , which resulted an increase in demand for the french fries. Due to higher consumption of french fries, the health of people is adversely effected and hence the demand for fast food has decreased. This led to the shutdown of the half of the fast food restaurants. So, option 3 is the correct answer.