Question

Price ceilings and price floors: a)shift demand and supply curves and therefore have no effect upon the rationing function of prices. b)interfere with the rationing function of prices. c)make the rationing function of free markets more efficient. d)cause surpluses and shortages, respectively.

Answer 1

The correct answer is B.

A price floor is a policy established by economic authorities that consists on setting a threshold so that the price of a certain product or service cannot decrease under that. It distorts the market outcome when it is larger than the equilibrium price, because the amount supplied at the price floor level would the larger than the amount demanded by consumers and, hence, there is an excess of supply or surplus. Therefore, the market does not clear because the rationing function of prices has been externally influenced.

A price ceiling is a similar policy established by economic authorities. A threshold is set so that the price of a certain product or service cannot increase over it. It distorts the market outcome when it is smaller than the equilibrium price, because the amount supplied at the price ceiling level would the smaller than the amount demanded by consumers and, hence, there is an excess of demand of shortage. Again, the market does not clear because the rationing function of prices has been externally distorted.

A market clears when the equilibrium is reached and the amount supplied equals the amount demanded, so that the desires of both producers and consumers meet.