Question

11) Refer to the figure below, which shows the market for vitamins. Suppose the government imposes a price ceiling of Py. How will the price ceiling affect the quantity supplied, quantity demanded and quantity exchanged? Price Supply Price ceiling Demand Quantity of vitamins 12) Refer to the figure below, which shows the market for watermelons. Suppose the government imposes a price floor of Pw. How will the price floor affect the quantity supplied, quantity demanded and quantity exchanged? Price (dollars) Supply Price floor Demand Quantity of watermelons

Answer 1

(11)

Since ceiling price is higher than equilibrium price (at intersection of demand and supply curves, at point E with equilibrium price P0 and quantity Q0), this is not binding. A binding and effective ceiling price is imposed below equilibrium price level. So the non-binding price ceiling does not change equilibrium, and equilibrium price remains at P0 and market quantity demanded, quantity supplied and quantity traded remains at Q0.

Price Supply Price ceiling PO Demand QO Quantity of vitamins

(12)

Since floor price is lower than equilibrium price (at intersection of demand and supply curves, at point E with equilibrium price P0 and quantity Q0), this is not binding. A binding and effective floor price is imposed above equilibrium price level. So the non-binding price floor does not change equilibrium, and equilibrium price remains at P0 and market quantity demanded, quantity supplied and quantity traded remains at Q0.

Price (dollars) Supply PO Price floor Demand QO Quantity of watermelons