Question

Suppose that, in a competitive market without government regulations, the equilibrium price of donuts is $1.00 each. Indicate whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding.
1) The government prohibits donut shops from selling donuts for more than $1.20 each.
2) Due to new regulations, donut shops that would like to pay better wages in order to hire more workers are prohibited from doing so.
3) The government has instituted a legal minimum price of $0.80 each for donuts.

Answer 1

Answer:

1. Price ceiling, Binding

2. Price ceiling, Binding

3. Price floor, binding

Explanation:

Price ceiling is a government or group control limit on how high a product, commodity or service can be charged.

Price floor is a government or group limit on how low a product, commodity or service can be charged.

Binding simply means you are legally bound to something while non-binding means you are not legally bound to it.