6. If the government wants to create a price floor that has a binding impact on

Question

6. If the government wants to create a price floor that has a binding impact on the market, they need to set the price floor: a. b. c. d. Above the market equilibrium price Below the market equilibrium price Exactly at the market equilibrium price Any of the above would set a binding price floor in the market frent control policies for apart the blanks in the following statement: Rent control policies are expected to create a the market, and this will be a more severe problem in the in a. Shortage, long-run b. Shortage, short-run c. Monkey, coconuts d. Surplus, long-run e. Surplus, short-run

Explanation / Answer

6. a) Above the market equilibirum price.

Support Price/ Price Floor: When government fixes the price of a product at a level higher than equilibrium price, it is called support price. As a result, the supply becomes in excess of demand. Support price is the minimum guaranteed price at which producers can sell their output to the government if so desired. The main consequence of support price is that consumers have to pay a higher price for the good. On the other hand, the income of the producers goes up. The aim of support price is to insulate the farmers from fluctuations in their income which are caused by price variations in the free market.

7. b) shortage; short run

Rent control is set below equilibrium price which increases demand of houses while supply is less. It leads to shortage of houses in the market. But in long run, demand and supply adjusted.

8. d) shortage of 54 units

At price of 12, demand is greater than supply so leads to shortage.

Shortage = Demand - Supply = 104 - 50 = 54

9. Change in quantity demanded = 104 - 80 = 24

Change in quantity supplied = 80 - 50 = 30

b) False

10. e) There will be no change in quantity demanded with this price floor.

This price floor is not binding.

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