Answer:
1. his price ceiling is biding.
2. The market price will be $110 since it is binding
3. The quantity supplied will be reduced by the suppliers.
4. The quantity demanded will be increased by the buyers.
5. Therefore, a price ceiling of $110 will result in a shortage.
Explanation:
A price ceiling is a government or legally imposed maximum price or price limit at a good must be sold. The price ceiling is usually set below the equilibrium price determined by the forces of the demand and supply in order to prevent the good becoming too expensive for the consumers.
When there is a price ceilings quantity demand will be higher than the quantity supplied and this will result in a shortage. This is demonstrated with an example below.
<u>Check the following example</u>
For example, let us assume that government imposed a price ceiling of $60 when the quantity supplied by the supplier is QS = 4P
, and the quantity demand is by the consumers is QD = 400−P.
The equilibrium price determined by the forces of demand and supply without the government intervention will be as follows:
QS = QD
4P = 400 - P
4P + P = 400
5P = 400
P = 400 ÷ 5
P = $80
This shows that the equilibrium price of $80 is higher than the price ceiling of $60 which is binding.
At P = $80, the quantity demanded (QD) and supplied (QS) will be equal. That is:
QS = 4P
= 4 × 80
QS = 320
QD = 400 - P
= 400 - 80
QD = 320
This implies that at market determined price of $80, QS = QD = 320 units.
But at P = $60 price ceiling, we will have:
QS = 4P
= 4 × 60
QS = 240
QD = 400 - P
= 400 - 60
QD = 340
QD - QS = 340 - 240 = 100 units shortage.
This implies that at the price celing of $60, QS ≠ QD, this resulted into a 100 units shortage.
