Question

Indicate whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding.
a. There are many teenagers who would like to work at grocery stores, but they are not hired due to minimum-wage laws.
b. The government has instituted a legal minimum price of $5 each for hamburgers. There are many teenagers who would like to work at fast-food restaurants, but they are not hired due to minimum-wage laws.
c. The government prohibits fast-food restaurants from selling hamburgers for more than $8 each.

Answer 1

Answer:

a. price ceiling, binding

b, price floor non binding

price ceiling, binding

c. price ceiling, non binding

Explanation:

A price floor is when the government or an agency of the government sets the minimum price of a product. A price floor is binding if it is set above equilibrium price.

Because price is set above equilibrium price, quantity supplied would exceed quantity demanded and there would be a surplus.

If price were set below equilibrium price (the price floor is non-binding) there would be shortages as quantity demanded would exceed quantity supplied

Price ceiling is when the government or an agency of the government sets the maximum price for a product. It is binding when it is set below equilibrium price.

Effects of a binding price ceiling

1. It leads to shortages

2. it leads to the development of black markets

3. it prevents producers from raising price beyond a certain price

4. It lowers the price consumers pay for a product. This increases consumer surplus