Describe in writing as well as show graphically. The government mandates that the minimum price of...

Describe in writing as well as show graphically.

The government mandates that the minimum price of the textbooks hold above the equilibrium price level. How does this government mandated price impact the price and quantity of books? WHY? What do you call this type of market price or price condition?

As an alternative to question 1, the government mandates that the price of textbooks be held below the equilibrium price level. How does this government mandated price impact the price and quantity of books? WHY? What do you call this type of market price or price condition?

Solutions

Expert Solution

The government mandate to sell the books at a price above the equilibrium price will affect the demand and supply of the books adversely. It will increase the supply of the books and decrease the demand because at the price higher than the equilibrium price the demand will be low. This market price or the price condition is called Price floor.

In the graph shown below the market price at equilibrium is at P and market equilibrium is at Q. After the price floor set by the government the new quantity is Qs and the new demand is only Qd.

Now, if the government mandates to set the price below the market equilibrium that will be called price ceiling. At this price, the market demand will be more than the market supply. The government set price is below the equilibrium that means there will be unsatisfied demand i.e. more demand and less supply.

In the graph shown below the demand is at Qd and supply at Qs. The price Pc is set below the equilibrium price.

Rahul Sunny answered 1 year ago

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