Question

Suppose the equilibrium price of a pound of bacon is $3.50. The government decides that people have a right to a pound of bacon at an affordable price. To protect this new right, the government passes a law setting a maximum price of $1.50 for bacon. As a result of the legislation, there will be Choose one: A. either an excess supply or an excess demand for bacon; it depends on the market reaction to the price control. B. neither an excess supply nor an excess demand for bacon. C. an excess supply of bacon. D. an excess demand for bacon.

Answer 1

Answer:

The correct answer is option D.

Explanation:

The equilibrium price of a pound of bacon is $3.50.

In order to protect the consumers, the government imposes a binding price ceiling of $1.50.  

This price ceiling will create a shortage of bacon or an excess demand for bacon in the market.  

Because of the law of demand and law of supply, at price lower than the equilibrium price, the quantity demanded will be higher while the quantity supplied will be lower.  

This difference between quantity demanded and quantity supplied will create an excess demand in the market.