Answer to Question #81013 in Microeconomics for Andrea

Question

Assume that the market price for a 5kg bag of rice is R80 and the government has announced that a 5kg bag of rice cannot be sold for less than R100.
With the aid of a well labelled diagram, explain the effect the above government decision will have in the market for rice.

Answer 1

Increasing the price of the bag of rice would lead to lower sales volume in the market. Consequently, the demand for rice decreases as people opt to seek cheaper alternatives such as maize flour.