Question

The language of price controls Suppose that, in a competitive market without government regulations, the equilibrium price of hamburgers is $7 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.
The government has instituted a legal minimum price of $8 each for hamburgers.
There are many teenagers who would like to work at fast-food restaurants, but they are not hired due to minimum-wage laws.
The government prohibits fast-food restaurants from selling hamburgers for more than $8 each.
Statement Price Control(ceiling/floor?) Binding or Not (ceiling/floor?)
Due to new regulations, fast-food restaurants that would like to pay better wages in order to hire more workers are prohibited from doing so.
The government has instituted a legal minimum price of $5 each for hamburgers.
The government prohibits fast-food restaurants from selling hamburgers for more than $5 each.

Answer 1

Solution :

In the first statement, the government institutes a legal minimum of 8 dollar is considered a price floor because it imposes the lower limit on market price. It is binding as the market price is lower at the price of 7 dollars.

In the second statement, it is a price floor as the statement speaks about minimum wage laws that are creating the unemployment. The minimum wages also imposes lower limit at market wage.

The third statement is a price ceiling as the upper limit on price has been imposed. This is not binding since the price is below ceiling price.