Question

1. Assume the equilibrium price for cookies is $2 a package. Suppose the government implements a price control of $3 in the market for cookies. (2 pts.)
   1. If the price control is a price ceiling, was the ceiling effective?

2. If the price control is a price floor, was the floor effective?

Answer 1

Answer

(a)

Price ceiling of $3 means that in the market no one can charge a price above $3. Here Equilibrium price is $2. As equilibrium price is lesser than Price ceiling means that Producer can charge Price of $2 in the Market. Thus Equilibrium price is chargable and hence Price of $2 will prevail in the market and thus price ceiling of $3 is of no use.

Hence, If the price control is a price ceiling, then Price ceiling was not effective.

(b)

Price floor of $3 means that in the market no one can charge a price below $3. Here Equilibrium price is $2. As equilibrium price is lesser than Price floor means that Producer can not charge equilibrium Price of $2 in the Market. Thus Equilibrium price is not chargable in the market and hence Price at which Price floor is set i.e. price of $3 will prevail in the market and thus price floor of $3 is will result in change in price from $2 to $3

Hence, If the price control is a price floor, then Price floor was effective.

Note :
price ceiling is effective when it is set below Equilibrium price and price floor is effective when it is set above Equilibrium price. Here Price control is set above equilibrium price . Thus this price control will be effective if it is a price floor.