Question

1. Why does a price ceiling set above the equilibrium price have no effect on the market?

2. Why is an increase in the minimum wage apt to affect teenagers more than other age groups?

3. Suppose that you are a manager working for Yum in the Taco Bell division. Taco Bell employs many employees at the minimum wage. If the minimum wage is already set above the equilibrium wage rate and then the government raises it still higher, what are the effects in the labor market? How do the changes in the labor market affect Taco Bell?

Answer 1

1. Price ceiling refers to the maximum upper limit of the price set by regulatory agencies beyond which sellers can not charge for a given good or service. Price ceiling becomes binding only when the ceiling is set below the equilibrium price. When the ceiling is set above the equilibrium price, it does not become binding. When the ceiling is set above the equilibrium price, the ceiling does not affect the price or quantity. The market reaches an equilibrium below the set price ceiling, so the price ceiling does not affect the equilibrium and the ceiling is not binding.