Question

1. The language of price controls Suppose that, in a competitive market without government regulations, the equilibrium price of milk is $2.50 per gallon. Complete the folowing table by indicating whether each of the statements is an example of a price ceiling or a price Rloor and whether it is nonbinding Price Control Binding or Not Statement Due to new regulations, grocery stores that would like to pay better wages in order to hire more workers are prohibited from doing so. The government has instituted a legal minimum price of $2.30 per gallon for milk. The government prohibits grocery stores from selling milk for more than S2.30 per gallon. Price ceiling Price floor Grade It NOW Save &Continue Contnue without saving

Answer 1

The current price of milk is $2.50 per gallon Maximum wage laws are imposed due to which the stores are unable to hire more workers by increasing the wage. Since the wage rate cannot rise above a certain level, the regulation is a price ceiling Since the firms are unable to carry out activities that they would have been able to carry out incase the market was free, the regulation is binding 1. The government imposes a regulation as per which milk cannot be sold for less than $2.30 per gallon Since the price cannot fall below a certain level, it is a price floor. The market price cannot fall below $2.30 and the free-market equilibrium price is $2.50. That is, the equilibrium price is attainable despite the regulation. Therefore, the price floor is not binding 2. 3. The government imposes a regulation as per which milk cannot be sold for more than $2.30. Since the price cannot rise above a certain level, is a price ceiling. The market price cannot rise above $2.30 but the free-market equilibrium price is $2.50. That is, the equilibrium price is unattainable due to the regulation. Therefore, the price ceiling is binding