Answer to Question #81134 in Economics of Enterprise for Sinazo

Question

Assume that the market price of a 5kg bag of rice is R80, the gorvenment has announced that, a 5kg bag of rice can be sold less than R100. With aid of well labelled diagram, explain what the effect the above decision will have in the market for rice

Answer 1

Assume that the market price of a 5kg bag of rice is R80, the government has announced that, a 5kg bag of rice can be sold less than R100. This decision will have no effect on the market for rice, because the government sets non-binding price ceiling, which is higher than equilibrium price for rice.