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Chapter 4: Q10 (page 104)

A price ceiling will have the largest effect:

a. substantially below the equilibrium price

b. slightly below the equilibrium price

c. substantially above the equilibrium price

d. slightly above the equilibrium price

Short Answer

Expert verified

Price Ceiling will have the largest effect, when set substantially below equilibrium price.

Step by step solution

01

Price Ceiling Concept 

Price Floor is maximum mandated sale price, at which a good is allowed to be sold, by regulatory body.

For ex : Maximum medicine sale price imposed.

02

Detail Explanation

Price Ceiling is imposed to protect the interests of buyers, protect them from exploitation.

It is binding if ceiling price is set below the free market equilibrium price. More the ceiling price is below free market equilibrium price, larger will be its effect.

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Most popular questions from this chapter

Imagine that to preserve the traditional way of life in small fishing villages, a government decides to impose a price floor that will guarantee all fishermen a certain price for their catch.

a. Using the demand and supply framework, predict the effects on the price, quantity demanded, and quantity supplied.

b. With the enactment of this price floor for fish, what are some of the likely unintended consequences in the market?

c. Suggest some policies other than the price floor to make it possible for small fishing villages to continue.

Table 4.6 shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? How can you tell? Now, imagine that because of a shift in the perceptions of foreign investors, the supply curve shifts so that there will be $10 million less supplied at every interest rate. Calculate the new equilibrium interest rate and quantity, and explain why the direction of the interest rate shift makes intuitive sense.

During a discussion several years ago on building a pipeline to Alaska to carry natural gas, the U.S. Senate passed a bill stipulating that there should be a guaranteed minimum price for the natural gas that would flow through the pipeline. The thinking behind the bill was that if private firms had a guaranteed price for their natural gas, they would be more willing to drill for gas and to pay to build the pipeline.

a. Using the demand and supply framework, predict the effects of this price floor on the price, quantity demanded, and quantity supplied.

b. With the enactment of this price floor for natural gas, what are some of the likely unintended consequences in the market?

c. Suggest some policies other than the price floor that the government can pursue if it wishes to encourage drilling for natural gas and for a new pipeline in Alaska.

Name some factors that can cause a shift in the

demand curve in labor markets.

How do economists define equilibrium in financial

markets?
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