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Chapter 3: Q. 8 (page 78)

Does a price ceiling change the equilibrium price?

Short Answer

Expert verified

No.

Step by step solution

01

Step1. Introduction 

Price ceiling is a level of price that is legally fixed above which the producers can't charge. It is fixed below the equilibrium price.

It is generally fixed for necessity goods.

02

Step2. Explanation

As explained, price ceiling is fixed below the equilibrium price in a market legally. The equilibrium price although remains the same as it is an economic concept affected by change in market demand and supply. Though the equilibrium price can not be attained due to legally fixed price ceiling, but the equilibrium continues to be the same, though unattainable.

The exchange however now takes place at the price ceiling, with quantity supplied getting traded fully (quantity supplied < quantity demanded) and leading to an excess demand situation.

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Most popular questions from this chapter

What determines the level of prices in a market?

Table 3.9 illustrates the market's demand and supply for cheddar cheese. Graph the data and find the equilibrium. Next, create a table showing the change in quantity demanded or quantity supplied, and a graph of the new equilibrium, in each of the following situations:

(a) The price of milk, a key input for cheese production, rises, so that the supply decreases by 80pounds at every price.

(b) A new study says that eating cheese is good for your health, so that demand increases by 20%at every price.

Price per poundQdQs
\(3.00750540
\)3.20700600
\(3.40650650
\)3.60620700
\(3.80600720
\)4.00590730

Table 3.8 shows the information on the demand and supply for bicycles, where the quantities of bicycles are measured in thousands.

PriceQdQs
\(1205036
\)1504040
\(1803248
\)2102856
\(2402470

(a) What is the quantity demanded and quantity supplied at a price of \)120?

(b) At what price is the quantity supplied equal to 48,000?

(c) Graph the demand and supply curves for bicycles. How can you determine the equilibrium price and quantity from the graph? How can you determine the equilibrium price and quantity from the table? What are the equilibrium price and the equilibrium quantity?

(d) If the price was $120, what would the quantities demanded and supplied be? Would a shortage or surplus exist? If so, how large would the shortage or surplus be?

What does a downward-sloping demand curve mean about how buyers in a market will react to a higher price?

Suppose there is a soda tax to curb obesity. What

should a reduction in the soda tax do to the supply of sodas and to the equilibrium price and quantity? Can you show this graphically? Hint: Assume that the soda tax is collected from the sellers.
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