Chapter 4: Problem 13

Market price may not reach equilibrium if there are ______. a) both price ceilings and price floors b) neither price ceilings nor price floors c) only price ceilings d) only price floors

Short Answer

Expert verified

The market price may not reach equilibrium if there are \(a)\) both price ceilings and price floors.

Step by step solution

Introduction to Market Equilibrium

Market equilibrium is the point at which the quantity demanded by consumers equals the quantity supplied by producers. At this point, the price of a good or service has reached a level where there is neither a shortage nor a surplus, and both consumers and producers are satisfied. Market equilibrium occurs when the forces of supply and demand are balanced.

Understanding Price Ceilings and Price Floors

Price ceilings and price floors are government interventions that set maximum (price ceiling) or minimum (price floor) prices for a particular good or service. A price ceiling is a maximum price that can be legally charged for a good or service, while a price floor is a minimum price that can be legally paid for a good or service.

Effects of Price Ceilings on Market Equilibrium

A price ceiling, which is set below the market equilibrium price, can lead to a shortage in the market. The lower price encourages increased demand but discourages production, as producers may not be able to cover their costs at the lower price. As a result, supply decreases, and the market does not reach equilibrium.

Effects of Price Floors on Market Equilibrium

A price floor is set above the market equilibrium price and results in a surplus in the market. The higher price discourages demand, as consumers may not be willing to pay the higher price. At the same time, the higher price encourages production, as producers can make more profit. As a result, the supply increases, and the market does not reach equilibrium.

Conclusion and Answer

Given our understanding of market equilibrium and the effects of price ceilings and price floors, we can conclude that if there are both price ceilings and price floors, the market price may not reach equilibrium. Therefore, the correct answer is (a) both price ceilings and price floors.