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Chapter 4: Q. 4.5 (page 75)

Explain the effects of price floors and government-imposed quantity restrictions

Short Answer

Expert verified

Imposing a minimum price above the equilibrium leads to excess supply.

Step by step solution

01

Step1. Introduction

Price floor is a method of price control where the government introduces a minimum price at which the exchange of that particular good can occur. This price is above the market equilibrium price.

02

Step2. Explanation

When such price which is above the market equilibrium is imposed, it implies that suppliers will supply more than the equilibrium quantity and consumers will demand less than the equilibrium quantity. This leads to a situation of excess supply in the market.

Quantity restrictions are similar to quotas where the government, instead of controlling the equilibrium through price, attempts to control it directly by altering quantities. The government may restrict the producers to produce more than a given limit.

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Most popular questions from this chapter

Consider the diagram below,which depicts the labor

market inacity that has adopteda"living wage law"

requiring employers to payaminimum wage rate of

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Explain the effects of price ceilings
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