Question

Assume that the market for beer is initially at equilibrium with a price of $9 and a quantity of 100. Describe what will happen in the market under two situations

A) the government implements a price floor of 7$

B) the government implements a price ceiling of $7

Answer 1

A) there is a price floor of $7 which is less than the equilibrium price of $9. Price floor sets minimum price below which a product cannot be sold. since the equilibrium price is already higher than the price floor in this case there is no effect of price floor on the market outcome. therefore market price will continue to be $9 and the market quantity will continue to be 100 units

B) price ceiling sets a maximum price above which a product cannot be sold. In this case it is set at $7 which is less than the market equilibrium price of $9. Therefore we expect that there will be a shortage because quantity demanded will be greater than quantity supplied at $7.