How does an effective price ceiling affect the quantity demanded and the quantitysupplied in a competitive market? Provide an example.

Answered: How does an effective price ceiling…

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter4: Prices: Free, Controlled, And Relative

Section: Chapter Questions

Problem 9QP

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Question

How does an effective price ceiling affect the quantity demanded and the quantity
supplied in a competitive market? Provide an example.

Expert Solution

Step 1

Price ceiling is a type of price control imposed by the government as the maximum price at which the goods and services can be sold. It can be imposed above or below the equilibrium price level.

When the price ceiling is below the equilibrium level, it is called effective price ceiling.

When the price ceiling is above the equilibrium level, it is called non-effective price ceiling.

Consider the following diagram,

The equilibrium price is $5 and equilibrium quantity is 20 units.

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