Question

Suppose that the equilibrium price of a pair of designer Lucky jeans is $300. The government decides that people have a right to an affordable pair of designer Lucky jeans. To protect this new right, the government passes a law setting a maximum price of $100 for jeans. As a result of the legislation, the price of a pair of designer Lucky jeans will be _________.

Answer 1

Answer:

$100

Explanation:

A binding price ceiling will artificially set a maximum price for a product, but that doesn't mean that the supplier will be willing to supply goods at that price. Binding price ceilings result in shortages, since the quantity demanded increases, while the quantity demanded decreases. This results in a loss of economic benefit known as deadweight loss.

As seen in the attached graph, the deadweight loss is equal to the area beneath the demand curve and above the supply curve, to the left of the equilibrium price.