Question

Suppose that, in a competitive market without government regulations, the equilibrium price of hamburgers is $5 each.
1. 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:
a. The government has instituted a legal minimum price of $3 each for hamburgers
b. The government prohibits fast-food restayrants from selling hamburgers for more than $8 each.
c. 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.

Answer 1

Answer:

1. Price floor, binding

2. Price ceiling, binding

3. Price ceiling, binding

Explanation:

Price ceiling is a government or organization limit on how high a product, commodity or service can be charged.

Price floor is a government or organization limit on how low a product, commodity or sevice can be charged.

Binding is when you are bound legally to something while non binding you are not legally bound to it.

Answer 2

Answer:

a. Price floor; nonbinding

b. Price ceiling; nonbinding

c. Price ceiling; binding.

Explanation:

a. The government has instituted a legal minimum price of $3 each for hamburgers

This is price floor that is nonbinding.

Price floor refers to a price control in which the least price to be charged for a commodity is imposed by a government or a group. A price control will be effective and binding when it is set above the equilibrium price, but will not be effective and nonbinding when it set below the equilibrium price.

Since the price floor of $3 is lower than the equilibrium price of $5, it is nonbinding.

b. The government prohibits fast-food restaurants from selling hamburgers for more than $8 each.

This is price ceiling that is nonbinding.

A price ceiling can be described as the legal maximum price set a commodity to be sold. When a price ceiling is set below the equilibrium price, it will be effective and binding because it will cause a supply shortage. However, when a price ceiling is set above the equilibrium price, it will not be effective and nonbinding because it has no impact on the quantity supplied in the market

In this question therefore, the price ceiling of $8 is nonbinding because it is above the equilibrium price of $5.

c. 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.

This is price ceiling or maximum wage that is binding.

From the question, it can be inferred that price ceiling is set below the equilibrium wage because the fast-food restaurants are ready to pay better wages or wages that are higher than the maximum wage in order to hire more workers but they are prohibited by law. The price ceiling is effective and binding because it has caused a shortage as demand for workers is now higher than quantity of workers supplied at the maximum wage.