Answer to Question #247262 in Macroeconomics for mujtaba syed

Question

suppose the government implements a price ceiling of $20/unit in this market. Is this price ceiling binding on the market? What are the quantities demanded and supplied at the price ceiling? How many units are exchanged at this price? Given the effects of the policy, is there a potential for illegal trade? Briefly explain your answers where necessary.

Answer 1

If government imposes a price ceiling of $20 per unit then:

Qs$=$ Qd

100$-$ 2$(P-20)$ $=$ $-20+2P$

160$=$ 4P

P$=$ 40

Qd$=$ $-20+2(40)=$ 60 units

Price ceiling will be non-binding since  the level of the price ceiling is greater than equilibrium price.

Price is above equilibrium price. Therefore quantity supplied will exceed quantity demanded and excess surplus will result.

Governments impose price ceilings in order to keep the price of some necessary goods or services affordable

A price ceiling is a mega maximum price that one pays for some goods or services.