1) explain what a price ceiling is? 2)Do binding price ceilings cause shortages or surpluses? Explain...

1) explain what a price ceiling is?

2)Do binding price ceilings cause shortages or surpluses? Explain why.

3) What are at least three unintended consequences of binding Price Ceilings? Explain.

4) explain what a price floor is?

Solutions

Expert Solution

A) Price ceiling is the maximum price that a producer can charge for its product. Ceiling price is determined by the government.Price ceiling is of two types:

a) Binding Price Ceiling

b) Non- binding price ceiling.

As shown in the diagram binding price ceiling refers to the price ceiling when price is set below the equilibrium price. In the above diagram equilibrium price is OP and price ceiling is OP_c. at that price demand is higher and supply is less therefore there is an excess demand or shortage in the market.

3) Three consequence are:

Shortage: Since after price ceiling has introduced price in the market pricr will fall as a result demand of the good will higher than the its supply. Therefore this will create shortage of the product in the market. This is the first unintended consequence of the price ceiling.
Black Market: As there is a shortage in the market the producer will start hoarding its output. since, they know that there is excess demand in the market they will try to sell their product at higher price. The buyer who can afford the good will buy from them. This is done to earn profit.
Degradation: Since after price ceiling, price will fall as a result producer start using cheap quality raw material in the production process because profit margin is declining. Hence product quality is degraded.

4) Price floor on the other is just opposite of price ceiling. It is the minimum price that a producer can charge for its product. This price control is always used on the agricultural commodities where farmers do not get sufficient price for its output.

There are two types of price floor:

a) Binding price floor: In this price floor, price is set always above the equilibrium price. This will create surplus im the market.

Unbinding Price Floor: In this price floor goods are bought and sold at the equilibrium price. It does not affect the market as price is set below the equilibrium price.

Rahul Sunny answered 9 months ago

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