Suppose that, in a competitive market without government regulations, the equili

Question

Suppose that, in a competitive market without government regulations, the equilibrium price of gasoline is $3.00 per gallon. Complete the following table by indicoting whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding. Note: Answers in the Price Control column will be either "Price floor" or "Price ceiling". Answers in the Binding column are "Yes" or "No". Statement Price Control Binding? The government prohibits gas stations from selling gasoline for more than $3.40 per gallon. There are many teenagers who would like to work at gas stations, but they are not hired due to minimum-wage laws. The government has instituted a legal minimum price of $2.50 per gallon for gasoline.

Explanation / Answer

Ans:

Price floor is the minimum price that can be charged for a good or service.A binding price floor is one that is set above equilibrium price.In this case since the legal minimum price($2.5) is lower than equilibrium price($3), it is not binding.

Price ceiling is the maximum price that can be charged for a good or service.A price ceiling is binding when the required price($3.4) is below equilibrium price($3).In this case required price is above equilibrium price.Hence it is not binding.

Statements Price control Binding The government prohibits gas stations from selling gasoline for more than $3.4 per gallon Price ceiling No There are many teenagers who would like to work at gas stations but they are not hired due to minimum wage laws. Price floor Yes The government has instituted a legal minimum price $2.5 per gallon for gasoline. Price floor No

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