Question

The low-income country of Afghanistan decides on two related policies. One policy sets a price ceiling on kabuli palao (the country's national dish) to make sure that the dish is as affordable to poor people as to the rich. The policy sets a price floor on agricultural workers' wages. The main ingredients for kabuli paloa are rice, lamb, and beef.

a.Define a price ceiling, and a price floor.

2

b.Characterize the effect of a price ceiling on the quantity demanded and supplied of kabuli paloa.

c.Characterize the effect of a price floor on the quantity demanded and supplied of kabuli paloa.

d.What specifically happens to the equilibrium price and quantity of kabuli paloa?

Are these policies "good" for the country? Opinions

Answer 1

A) price ceiling is the maximum legal price where as price floor is minimum legal price.

B)When there is effective price ceiling then quantity demanded of Kabuli pulao will increase and quantity supplied will decrease leading to shortage of Kabuli pulao.

C) Price floor is the minimum legal price and it is effective when price floor is greater than equilibrium price. Price floor will increase the quantity supplied and will decrease the quantity demanded leading to surplus of Kabuli pulao.

D)when price floor is levied on agicultural worker then income of workers increases and price ceiling leads to lower price, leading to high demand of kabuli paloa and equilibrium price ahould be increased to retain equilibrium.