Question

utawa JC40U/ assignments/1665703?module item id=3855147 2.(4 pts) Assume a market where equilibrium price and quantity are $15 and 100 units respectively. Buyers are agitation for legislation to fix a maximum price at $12. If such legislation is passed, what effect is this likely to have in this market? Please explain in terms of supply and demand curves and changes to equilibrium price and quantity. Quantity Demanded 40 Quantity Supplied Price $15 zo

Answer 1

Assume a market where equilibrium price and quantity are $15 and 100 units re- spectively. Buyers are agitated or legislation to fix a maximum price at $12. If such a legislation is passed, what effect is this likely to have in this market? at Pc = 12. On the other hand, the buyers demand more at $12. Since the equilib- rium price (P* = $15) that balances demand and supply are above the price ceiling (Pc = $12) present in the market, the price ceiling becomes binding because market forces cannot naturally move the economy to the new equilibrium because when the market price hits the price ceiling, it can rise no more. Thus, quantity supplied will decrease from 100 to Qs and the quantity demanded will increase from 100 to Qd. However, since QD> Qs, there will be a shortage of (Qo-Qs) that arises at the price ceiling of PC because of a binding price ceiling. Answer - A price ceiling can be defined as the maximum price that can be charged for a product. Government exercise price ceiling to protect buyers so that the com- modity does not become too expensive. Price ceilings can be of two types – binding and non-binding, Price If the equilibrium price that balances demand and supply are below the price ceiling imposed by the government, then the price ceiling is non-binding. Market forces naturally moves the economy to equilibrium and the price ceiling does not have any impact on the quantity sold. p* = $15 However, if the equilibrium price that balances demand and supply are above the price ceiling imposed by the government, then the price ceiling is binding. Market forces cannot naturally move the economy to equilibrium because when the market price hits the price ceiling, it cannot rise any more. Thus, the market price is the maximum price ceiling imposed by the government. At this price, the quantity de- manded is greater than the quantity supplied and there is a shortage that arises use some people who are willing to buy the product at the ongoing price are unable to do so. Pc = $12 Qs Q =100 QD Quantity In the given scenario, the equilibrium price is set at $15. However, a legislation is passed such that the maximum price that the buyers need to pay is fixed at $12. So, the price ceiling is binding. Let us depict the above scenario in a graph. The equilibrium price and quantity are given by P* and Q* respectively. Now when the legislation such that the price ceiling (Pc) is at $12, the supply curve shifts rightward such that sellers supply less quantity