Answer to Question #129365 in Microeconomics for arshiam Zafar

Question

Suppose Demand and Supply curves both are perfectly inelastic. Use Supply-Demand Model, show the effect of binding price floor on equilibrium quantity

Answer 1

When the demand and supply curves both are perfectly inelastic, this implies that despite change in price, the quantity demanded and the quantity supplied are the same. 

Graphical representation of perfectly inelastic supply and demand is shown below.

Binding price floors on equilibrium quantity means that the government introduces laws that limits how low the price can be charged for a product at a certain quantity. Such laws protect the sellers from exploitation by the buyers who may take advantage of the situation to pay very low prices and expect to be supplied with very high quantities.