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Assume a market where the demand curve is p = 10 - q and the supply...

Assume a market where the demand curve is p = 10 - q and the supply curve is P = Q. The government sets a price floor where the price is 3. How does price regulation affect the quantity sold

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Answer #1

Market demand is p = 10 - q. Supply curve is p = q. Market price and quantity are

10- q = q

q* = 10/2 = 5 and price p* = q* = 5

Now a price floor is a legal price below which it is illegal to sell anything. Hence it becomes binding only when it is set above the market price. In this case market price is $5. Hence price floor has no effect because market price is already above the legal mandate. Hence the regulation has no effect on the quantity sold or market price.

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