Question

True or False and Explain. I expect a paragraph answer. A 3/5 is a satisfactory answer. There is one mark for True or False and four marks for your explanation. Please note I will not post up an answer key to these statements because in life there is no answer key.

1. A production quota results in overproduction.

2. A price floor is the maximum legal price that may be charged.

3. A price ceiling that is below the equilibrium price will be effective.

Answer 1

Answer

1. A production quota results in overproduction: FALSE

Reason:

A production quota results in underproduction and not overproduction. A policy to reduce quantity is called a quota, a government-imposed restriction on the number of goods bought and sold. The quota results in a consumer loss, whereas, on net, producers gain. This net welfare gain to producers is less than the value of the quota.

2. A price floor is the maximum legal price that may be charged: FALSE

Reason:

A price floor is the minimum legal price that may be charged. A price floor is a government- or group-imposed price control or limit on how low a price can be charged for a product, good, commodity, or service. A price floor must be higher than the equilibrium price in order to be effective.

3. A price ceiling that is below the equilibrium price will be effective: TRUE

Reason:

A price ceiling is a government- or group-imposed price control, or limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings to protect consumers from conditions that could make commodities prohibitively expensive.