Question

Assume a price floor is imposed in the market for milk at the current equilibrium price, and that a price ceiling is imposed in the market for natural gas at the current equilibrium price. What will a decrease in demand for both milk and natural gas create?

a. Shortages in both the milk and natural gas markets.

b. Surpluses in both the milk and natural gas markets.

c. A surplus in the milk market and a shortage in the natural gas market.

d. A shortage in the natural gas market and increase the quantity traded in the milk market.

e. A surplus in the milk market and a decrease in the quantity traded in the gas market

Please explain each step in detail to ensure I understand the process.

Answer 1

C. surplus in the milk market and a shortage in the natural gas market.

Price floor is a type of government intervention where the government fix a minimum price which is above the equilibrium price with an objective to ensure sufficient revenue to the producers, as the equilibrium price is considered as non remunerative for the producers. When government increases the price above the equilibrium price, only demanded falls ( law of demand) and quantity supplied rises ( law of supply). This situation results in excess supply or surplus in the milk market ( Quantity Demanded is less than Quantity supplied).

Price ceiling is a type of government intervention will the government fix a maximum price which is below the equilibrium price as at the equilibrium price some section of the society is not able to afford goods at market price. When government lowers the price , Quantity Demanded rises ( law of demand) and Quantity supplied falls ( law of supply). This brings a situation of excess demand or shortage in the natural gas market. ( Quantity demanded is more than Quantity supplied).