Question

Suppose the current equilibrium of pizza is $5. If the government decides the price of pizza cannot rise above $4, there would be:
a. a shortage of pizzas
b. no impact on the equilibrium price and quantity of pizzas
c. a rightward shift of the supply curve of pizzas
d. a rightward shift of the demand curve for pizzas
e. a surplus of pizzas

Answer 1

Answer:

(A) a shortage of pizzas

Explanation:

Given an equilibrium price of $5 (where demand equals supply), a cap of $4 on the price of pizza by the government will result in the following.

• demand for pizza will increase (as demand rises as price falls)
• supply of pizza will decrease (as supply falls as price falls).

Accordingly, there will be a shortage of pizza in the market as demand rises above equilibrium demand, and supply falls below equilibrium supply.