Question

Suppose the local government is concerned about the health of local school children, and for that reason imposes a price ceiling of $3 on yogurt. Based on the graph below, which of the following is true? S6 S4 Price Ceiling S2 6 O The quantity supplied will be 4 yogurts. O The quantity demanded will be 5 yogurts. O There will be a shortage of 3 yogurts

Answer 1

Price ceiling is such a situation where the price is fixed by the giverngove either above or below the market equilibrium price. In this situation the market equilibrium price happened to be at the point of intersection of the demand and the supply curve for yogurts, that happens at the price level $5 and the supply of yogurt at this market clearing price is 4 units.

The local government here is concerned with the health of school children, they are setting a price ceiling at $3; so as to make the price of yogurt affordable. In such a case with the imposition of the ceiling, there arises a shortage of supply as the quantity demanded is 5 units. The supply of yogurt feasible at the ceiling price of $3 is 3 units. One until less than the original market clearing level of 4 units. At this level since the Deanna is of 5 units the quantity supplied possible is 3 units, there exists a shortage of 2 units.