Which statement best describes the concept of a binding price ceiling? Assume that the equilibrium
price of gasoline is 3$ per litre?
The government prohibits gas stations from selling gasoline for more than 1.80$ per litre. A price ceiling
is a legal maximum price at which a good can be sold. Prohibiting gas stations from selling gasoline for
more than $1.80 or $4.00 are both examples of price ceilings.
A binding price ceiling is a price ceiling that is set below the equilibrium price. Since the equilibrium price
is $3, the price has to be $1.80, due to the fact that binding price ceilings cause a shortage, while a non-
binding price ceiling has no effect on the equilibrium price and quantity.
Calculating tax incidence (Question 5):
Suppose that the Canadian government decides to levy a tax (such as an excise tax) on cola consumers.
Before the tax, 20000 cases of cola were sold every week at a price of $6 per case. After the tax, 12000
cases of c