Question

6.Explain the following concepts. Use examples and diagrams where appropriate.

a) Price ceiling

b) Heuristics (in the context of behavioral economics)

Answer 1

(a) A price ceiling is a government/group imposed price control/limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings to protect consumers from conditions that could make commodities prohibitively expensive. It occurs when the government puts a legal limit on how high the price of a product can be. In order for a price ceiling to be effective, it must be set below the natural market equilibrium. When a price ceiling is set, a shortage occurs. Example is a price ceiling on apartment rents, which some cities impose on landlords.

(b) Heuristics are defined as cognitive shortcuts or rules of thumb that simplify decisions, especially under conditions of uncertainty. Basically there are three types of heuristics:

• availability,
• representativeness, and
• anchoring and adjustment

Heuristics can be mental shortcuts that ease the cognitive load of making a decision. Examples that employ heuristics include using a rule of thumb, an educated guess, an intuitive judgment, a guesstimate, profiling, or common sense.