Micro

Market Equilibrium

Easy

Comprehension:

Read the passage carefully and answer the questions based on the passage:

Concept of Price Ceiling

It is not very uncommon to come across instances where the government fixes a maximum allowable price for certain goods. The government-imposed upper limit on the price of a good or service is called a price ceiling. A price ceiling is generally imposed on necessary items like wheat, rice, kerosene, sugar etc. The objective of the price ceiling is to restrict the price of a good so that it becomes affordable for consumers to buy. However, it does not always generate the desired results. Most of the time, intervention by the government in the form of a price ceiling leads to various socio-problems.

In order to be effective, the price ceiling should be determined _______.

Below the market determined price.

Above the market determined price.

At the same level as of the market determined price.

Either above or below the market determined price.

✅ Correct Option: 1

Option 1 -> A price ceiling below market price is binding and creates shortages.

Option 2 -> A price ceiling above market price is non-binding and has no effect.

Option 3 -> A price ceiling at market price doesn't constrain the market.

Option 4 -> Only below market price makes a price ceiling effective.

Hence, Option 1: Below the market determined price -> A price ceiling is a maximum legal price set by the government. For it to be effective (binding), it must be set below the equilibrium market price. When set below the market price, it prevents sellers from charging the natural equilibrium price, which typically leads to excess demand (shortages) as quantity demanded exceeds quantity supplied at the ceiling price. If set above or at the market price, the ceiling becomes non-binding since the market naturally operates at or below that level anyway. -> correct

Question 46

Imposition of price ceilings usually results into?

Question 47

Suppose the market determined rent for apartments is $200 per month. The government intervenes and sets the rent control at $250 per month. What is the likely impact of this intervention on market of apartments?

Question 48

Price ceilings are also known as............

Question 49

The market determined price of a good is Rs. 40.The government determines the price ceiling on the good as Rs. 25. Calculate the excess demand/excess supply it will cause if the demand and supply functions are Qd= 200 – p and Qs=120+ p respectively.

In order to be effective, the price ceiling should be determined _______.

Solution

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