1. The language of price controls Suppose that, in a competitive market without
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Question
1. The language of price controls Suppose that, in a competitive market without government regulations, the equilibrium price of donuts is $1.50 each. Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding Price ControBinding or Not Statement There are many teenagers who would like to work at donut shops, but they are not hired due to minimum-wage laws The government has instituted a legal minimum price of $1.00 each for donuts. The government prohibits donut shops from selling donuts for more than $1.00 each Grade It Now Save & Continue Continue without savingExplanation / Answer
Statement 1:
Price control: Price Floor
It is binding
Since the minimum wage is the lowest level of wage, an employer has to give, so it is a price floor. It is binding and due to this reason, teenagers are unable to be hired at the donut shops.
Statement 2:
Price Control: Price Floor
It is non-binding
Since the market price is $1.5 per donut and minimum price set by the government is $1 per donuts so it is non-binding in nature.
Statement 3:
Price Control: Price Ceiling
It is binding
Since the firms cannot sell one donut at more than $1 price per donut even if the market price at equilibrium is $1.5 per donut. So, firms are forced to reduce the price and sell it at only $1. Hence, it is binding in nature.
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