17. A low-income country decides to set a price ceiling on bread so they can mak

Question

17. A low-income country decides to set a price ceiling on bread so they can make sure that bread is affordable to the poor. The conditions of demand and supply are given in the following table. What are the equilibrium price and equilibrium quantity before the price ceiling? What will the excess demand or the shortage (that is, quantity demanded minus quantity supplied) be if the price ceiling is set at $2.40? At $2.00? At S3.60? Price $1.60 $2.00 $2.40 $2.80 $3.20 $3.60 $4.00 Demand 9,000 8,500 8,000 7,500 7,000 6,500 6,000 Supply 5,000 5,500 6,400 7,500 9,000 11,000 15,000

Explanation / Answer

Equilibrium price is the price corresponding to which demand equals supply.

The provided table shows that demand equals supply corresponding to the price of $2.80.

Thus, the equilibrium price is $2.80.

The quantity corresponding to the equilibrium price is the equilibrium quantity.

The quantity corresponding to equilibrium price of $2.80 is 7,500.

Thus, the equilibrium quantity is 7,500.

Price ceiling can only be effective if the price fixed is less than the equilibrium price.

The equilibrium price is $2.80.

So, price ceiling set at $2.40 will be effective.

At price of $2.40, quantity demanded is 8,000 and quantity supplied is 6,400.

Excess demand or shortage = QD - QS = 8,000 - 6,400 = 1,600

The excess or shortage be if the price ceiling is set at $2.40 is 1,600 units.

Price ceiling can only be effective if the price fixed is less than the equilibrium price.

The equilibrium price is $2.80.

So, price ceiling set at $2.00 will be effective.

At price of $2.00, quantity demanded is 8,500 and quantity supplied is 5,500.

Excess demand or shortage = QD - QS = 8,500 - 5,500 = 3,000

The excess or shortage be if the price ceiling is set at $2.00 is 3,000 units.

Price ceiling can only be effective if the price fixed is less than the equilibrium price.

The equilibrium price is $2.80.

So, price ceiling set at $3.60 will not be effective.

Thus, there will be no shortage or excess demand if price ceiling is fixed at $3.60.

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