Suppose that, in a competitive market without government regulations, the equili
ID: 1256118 • Letter: S
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 indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding.
Statement
Price Control
Binding or Not
Price ceiling
Price floor
Binding
Non-binding
Price ceiling
Price floor
Binding
Non-binding
Price ceiling
Price floor
Statement
Price Control
Binding or Not
The government prohibits gas stations from selling gasoline for more than $2.50 per gallon. selector 1Price ceiling
Price floor
selector 2Binding
Non-binding
The government has instituted a legal minimum price of $3.40 per gallon for gasoline. selector 3Price ceiling
Price floor
selector 4Binding
Non-binding
There are many teenagers who would like to work at gas stations, but they are not hired due to minimum-wage laws. selector 5Price ceiling
Price floor
selector 6Explanation / Answer
A price ceiling (floor) is imposed below (above) the free-market equilibrium price to be binding. While a price ceiling creates a shortage, a price floor creates a surplus. Therefore,
(1) Government prohibits gas stations from selling more than $2.50 - Price ceiling, Binding
(2) Government instituted legal minimum price of $3.4 per gallon - Price floor, Binding
(3) Many teenagers would like to work but not hired due to minimum-wage - Price floor, Binding
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