Question

Demand Quantity of vitamins 3. Refer to Figure 1-3, which shows the market for vitamins. Suppose the government imposes a price ceiling of PV. How will the price ceiling affect the quantity supplied, quantity demanded and quantity exchanged? Table 1-3 Price per kilo Quantity supplied (kilos) (Dollars) $2 Quantity demanded (kilos) 40,000 34,000 28,000 24,000 4,000 8,000 16,000

Answer 1

In figure 1.3, the price ceiling is done at price P_V which is above the equilibrium price which makes it non-binding. Price ceiling is generally done when the equilibrium price is too high in the market and a new price less than the equilibrium price is set to ensure that people can purchase those goods at lower prices. When the maximum price is set above the equilibrium price then in that case price ceiling is ineffective as there will be no change in the quantity demanded, quantity supplied or the quantity exchanged.