Question

Consider again the market for ice cream.
a.) Draw a graph of the supply and demand curves in the market for ice cream. Be sure to label

the curves, axes, and the competitive equilibrium.

b.) What is a price ceiling? Write a sentence.

c.) Suppose that, in an effort to ensure that all consumers have access to ice cream at a fair price, the government imposes a binding price ceiling in the market for ice cream. Draw a graph of the market for ice cream with a binding price ceiling. Label the quantity demanded, the quantity supplied, and the shortage created by the price ceiling.

4. d.) Why might consumers be willing to offer ice cream vendors bribes after the price ceiling is in place? Write one or two sentences.

5. e.) Why might consumers be willing to spend time waiting in long lines after the price ceiling is in place? Write one or two sentences.

Answer 1

a)

In the above graph,the market is in equilibrium at Point E where P=20 and Q=50

b) Price ceiling refers to the maximum price imposed by the government for a given good which is always set below the market equilibrium in order for it to be binding.

c)

When the binding price ceiling is imposed at P=15,the demand in the market increases to Q=60 as the consumers will be willing to buy more at a low price whereas the supply decreases to Q=40 because the producers would be willing to supply less at a lower price.

d) The consumers would be willing to offer a bribe to the producers because the price ceiling results in a shortage of goods by 60-40=20 units so all the consumers who wants the ice cream, would not be able to get it and some consumers would be willing to offer a bribe for it.

e) Consumers are willing to wait in a line as the price ceiling has reduced the equilibrium price and the equilibrium quantity so as the supply of the ice cream is limited and is being sold at a low price than before,the consumers would wait in line to buy it.