5) The above diagram shows the market for oranges given current market supply an

Question

5) The above diagram shows the market for oranges given current market supply and demand conditions. The government passes the law declaring current equilibrium price to be the "fair" price, and legally imposing "price ceiling" on the price of oranges. Next, suppose that the only change is that demand for oranges goes up. Such change in market conditions would lead to Finally, quantity transacted in this market will_ equilibrium price and excess demand. A) lower, no; increase. B) higher; positive; increase C) higher; no; decrease. D) higher; positive; remain unchanged. E) lower, no; remain unchanged.

Explanation / Answer

5. D

Explanation: When demand goes up, everything remaining constant, the equilibrium price will go up. However, due to the government imposed price ceiling, the market price does not grow up. As a result, the supply remains the same as suppliers would not supply extra if the price does not go up. So, there will be excess demand and quantity transacted will remain unchanged at the old level.

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