Question

Suppose that, in a competitive market without government regulations, the equilibrium price of donuts is $1.50 each. Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding. Statement Price Control Binding or Not The government has instituted a legal minimum price of $1.80 each for donuts. The government prohibits donut shops from selling donuts for more than $1.80 each. Due to new regulations, donut shops that would like to pay better wages in order to hire more workers are prohibited from doing so.

Answer 1

Answer:

A binding price floor is set above the equilibrium price as a minimum price

A binding price ceiling is set below the equilibrium price as a maximum price

Equilibrium price is $1.50

a) The government prohibits donut shops from selling donuts for more than $1.10 each = Price ceiling and it is Binding

b) The government has instituted a legal minimum price of $1.80 each for donuts = Price Floor and it is Binding

c) Due to new regulations donut shops that would like to pay better wages in order to hire more workers are prohibited from doing so = Price ceiling and it is non-binding (as firms are wiling to offer higher wages than the minimum wage rate)

Explanation: