Question

The government sometimes imposes a PRICE CEILING on some goods and services in a specific market.
a) Give one specific real-life example. (2.5 POINTS)
b) Does a price ceiling create a SHORTAGE or a SURPLUS in the market? (2.5 POINTS)
c) Give one reason for the government to impose such a price ceiling in a market. Explain why. (2.5 POINTS)
d) Also, mention three (03) problems that a price ceiling creates in a market. Explain. (2.5 POINTS)

Answer 1

a) Government provide Edible food for people below poverty line which prevent its price from rise.

b) Price ceiling is effectice when it is imposed below equilibrium price. At this price, demand is more than supply which will result in shortage of goods.

c) Government impose price ceiling to keep goods at affordable prices such that consumers are not exploited.

d) Consequence of price floor:

• It will result in shortage of goods where consumers who are willing to pay are not able to buy goods.
• It will result in creation of black market.
• It moves the economy away from equilibrium where demand equal supply and distort invisible hand.