Multiple Choice
Which of the following best describes the effect of income taxes in the context of price ceilings, price floors, and black markets?
23
views
5. Consumer and Producer Surplus; Price Ceilings and Floors
Price Ceilings, Price Floors, and Black Markets
Struggling with Microeconomics?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
To say that a price ceiling is binding is to say that the price ceiling:
A
is equal to the equilibrium price and allows the market to clear
B
is set above the equilibrium price and has no effect on the market
C
is set below the equilibrium price and restricts the market price from rising to equilibrium
D
is set below the equilibrium price but does not affect the quantity supplied
Verified step by step guidance1
Understand the concept of a price ceiling: it is a legal maximum price that sellers can charge for a good or service.
Recall that the equilibrium price is where the quantity demanded equals the quantity supplied in a free market without restrictions.
Analyze what happens if the price ceiling is set above the equilibrium price: since the market price is already lower, the ceiling does not restrict the price and thus has no effect.
Consider the case when the price ceiling is set below the equilibrium price: this prevents the price from rising to the equilibrium level, causing a shortage because quantity demanded exceeds quantity supplied.
Conclude that a binding price ceiling is one that is set below the equilibrium price and restricts the market price from reaching equilibrium, thereby affecting the market outcome.
Related Videos
Related Practice
Price Ceilings, Price Floors, and Black Markets practice set
Problem sets built by lead tutorsExpert video explanations