Homework SourseSuppose that in a competitive market without government regu
Suppose that, in a competitive market without government regulations, the equilibrium price of gasoline is $3.00 per gallon.
Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding.
Statement
Price Control
Binding or Not
Price ceiling
Price floor
Binding
Non-binding
Price ceiling
Price floor
Binding
Non-binding
Price ceiling
Price floor
| Statement | Price Control | Binding or Not |
|---|---|---|
| The government prohibits gas stations from selling gasoline for more than $2.50 per gallon. | selector 1 Price ceiling Price floor | selector 2 Binding Non-binding |
| The government has instituted a legal minimum price of $3.40 per gallon for gasoline. | selector 3 Price ceiling Price floor | selector 4 Binding Non-binding |
| There are many teenagers who would like to work at gas stations, but they are not hired due to minimum-wage laws. | selector 5 Price ceiling Price floor | selector 6 |
Solution
A price ceiling (floor) is imposed below (above) the free-market equilibrium price to be binding. While a price ceiling creates a shortage, a price floor creates a surplus. Therefore,
(1) Government prohibits gas stations from selling more than $2.50 - Price ceiling, Binding
(2) Government instituted legal minimum price of $3.4 per gallon - Price floor, Binding
(3) Many teenagers would like to work but not hired due to minimum-wage - Price floor, Binding
