The language of price controls Suppose that, in a competitive market without government regulations, the equilibrium price of milk is $2.50 per gallon.
Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or non-binding.
Statement Price Control Binding or Not
The government prohibits grocery stores from selling
milk for more than $2.30 per gallon.
The government has instituted a legal minimum price
of $2.30 per gallon for milk.
Due to new regulations, grocery stores that would like
to pay better wages in order to hire more workers are
prohibited from doing so.

Price ceiling binding

price floor non binding

price ceiling 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.

The minimum price is $2.30 which is less than the equilibrium price of $2.50. Thus, its a non binding price floor

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

the maximum price is 2.30 which is less than the equilibrium price of $2.50. Thus, its a binding price ceiling

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