Answer to Question #118106 in Microeconomics for Juliet

Question

After the imposition of the price ceiling (and initial market equilibrium), two events took place in
the cement market. First, Ghacem Company Limited obtained an efficient technology of production
which influenced supply of Ghacem cement. This was followed by the second event (after a year)
where the prices of raw materials for Ghacem cement production increased. An economist trained
in the University of Professional Studies, Accra is of the view that, the final equilibrium price, after
the effect of the second event has been felt, can only be lower than the initial equilibrium price (that
is when the two events have not occurred). Another economist trained in the University of Ghana,
however on the other hand thinks the final equilibrium price can only be higher than the initial
equilibrium price. By using appropriate diagram(s) briefly explain who is right. If none of the two
economists is right, what is your view?

Answer 1

The economist trained in the University of Ghana who thinks that the final equilibrium price can only be higher than the initial

equilibrium price is right. This will happen because increase in price of raw materials will increase the cost of production and the company will have to increase the price of cement to be able to cater for the cost of production.