Question

Consider the below market supply and demand curve

Market's Supply Price Market Demand Quantity Price Quantity C) 0.1 0.2 0.3 0.4 0.5 0 Infinity 0.1 0.2 0.3 0.4 0.5 C) 30 10) 17 20 25 17

a)The government imposes a price ceiling of £0.2 in the market for lemons. Define price ceiling
and describe the impact of a £0.2 price ceiling on the market for lemons

b.Discuss the reasons why governments sometimes choose to control prices.

Answer 1

A) Price ceiling refers to the government-controlled upper limit of price in the market beyond which sellers cannot charge for the subjected good or service.

At $0.2 price, the quantity supplied is 10 and the quantity demanded is 22. So, there will be a shortage of 22-10 = 12 units.

B) The government sometimes choose price control when sellers have an arbitrary power to charge a higher price or the government wants to use it a political strategy to keep the pricer lower as a part of populism.

Answer 2

a) A price ceiling is an economic tool used by the government to set the market price below the prevailing price so that no seller can ask for a higher than the ceiling price. In this manner it becomes the maximum price at which the good can be sold. When there is a £0.2 price ceiling on the market for lemons, there will be a shortage of lemons because at this price, quantity of lemons demanded is 22 units and the quantity of lemons supplied is 10 units. Hence the shortage is 12 lemons

b) Prices are controlled to support consumers (in case of price ceiling from price gauging, a practice of charging a very high price from consumers) and producers (in case of price floor when sellers are not able to receive enough remuneration from the prevailing price).