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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

In a market with a binding price ceiling, an increase in the ceiling will ______ the quantity supplied, _______ the quantity demanded, and reduce the _______.

a. increase, decrease, surplus

b. decrease, increase, surplus

c. increase, decrease, shortage

d. decrease, increase, shortage

To determine
The impact of increased price ceiling on the economy.

Explanation

The price ceiling is the maximum limit price that can be charged for a good or service in the market. This is to prevent the prices from going too high and prevent the exploitation of the consumers.

Option (c):

When there is a binding price ceiling imposed in the economy, the producers cannot charge higher than the set price from the consumers. When a price ceiling is imposed in the economy, it will reduce the profit of the producers. This is because they will not be able to charge a higher price than the government-set ceiling price in the economy. As a result of this shorter profit in the economy, the producers will produce less which will lead to shortage in the economy. Thus, when the limit of price ceiling increases, it will lead to higher revenue to the sellers and thus, they will supply more than before. But the increase in the price will reduce the quantity demanded in the economy and thus, lowering the demand and increasing the supply; this would reduce the economic shortage of the economy. Thus, option ‘c’ is correct.

Option (a):

When there is a binding price ceiling imposed in the economy, the producers cannot charge higher than the set price from the consumers. When a price ceiling is imposed in the economy, it will reduce the profit of the producers...

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