ECO 1104 Chapter Notes - Chapter 6: Ice Cream Cone, Price Ceiling, Price Floor

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Price ceiling: a legal maximum on the price at which a good can be sold. Price ceiling ex: imposing a price ceiling on the market for ice cream. Market price = price ceiling = upward pressure. At the price ceiling, the quantity of ice cream demanded exceeds the quantity supplied and there is a shortage of ice cream. When the government imposes a binding price ceiling on a competitive market, a shortage of the good arises and sellers must ration the scarce goods among the large number of potential buyers. Price floor: a legal minimum on the price at which a good can be sold. Price floor ex: imposed price floor on ice cream. Market price = price floor = downward pressure. At the price floor, the quantity of ice cream supplies exceeds the quantity demanded and there is a surplus of ice cream.

Related Questions

1. A price floor set above the market equilibrium price results in

A. a surplus at the floor price.

B. a shortage at the floor price.

C. no impact on quantity that will be put on sale in that market.

D. The most efficient use of our scarce resources.

2. Because of government price controls, a business must now sell soft-serve ice cream at half its original price. This business might respond by:

A. offering smaller servings of ice cream.

B. skimping on toppings of nuts, fudge sauce, and cherries.

C. reducing hours of operation.

D. All of the answers are correct.

3. GlaxoSmithKline owns a government grant of temporary monopoly rights on the AIDS drug Combivir due to:

A. patents.

B. laws preventing entry of competitors.

C. economies of scale.

D. innovation.

Why do shortages develop under a binding price ceiling?

1. It encourages sellers to produce more of the product

2. It encourages buyers to purchase less of the product

3. It makes the price so low that the quantity demanded exceeds the quantity supplied on the black market

4. It makes the price so low that the quantity demanded exceeds the quantity supplied in the legal market

5. It encourages sellers to increase the quality of the products they sell, which in turn increases the quantity demanded.

indigomink134

Why does a surplus exist under a binding price floor?

a. It makes the price so low that the quantity demanded exceeds the quantity supplied on the legal market.

b. It encourages sellers to produce less of the product.

c. It makes the price so high that the quantity supplied exceeds the quantity demanded in the legal market.

d. It encourages buyers to purchase more of the product.

jadeskunk825

ECO 1104 Chapter Notes - Chapter 6: Ice Cream Cone, Price Ceiling, Price Floor

ECO 1104 Full Course Notes

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