Question

California last summer was devastated by wildfires that have now created mudslides with the winter rain. This winter highway 1 was closed for weeks as they removed the mud. Because of the closed main road, milk was in greater demand but short on supply. The government put a temporary price ceiling on the cost of milk at $4. If the equilibrium for milk was at $7, what do you think was the result of the price ceiling?

Answer 1

Answer:

This will create shortage and people will sell milk in black market at higher price.

Explanation:

Wildfires and mudslides have closed the highways. This created greater demand and short supply.  

The equilibrium price increased to $7.  

But the government imposed a price ceiling of $4.  

At this binding price ceiling, the quantity demanded is more than quantity supplied.  

This high demand would cause the suppliers to sell milk in the black market at a higher price.