The market for Bucky refrigerator magnets has the following

The market for Bucky refrigerator magnets has the following demand and supply curves: (2 Part Question)

QD = 16 – P                           P: $/magnet                                     

            QS = 2*P – 8                        Q: magnets

The Madison City council decides to impose a price of $6 /magnet on all refrigerator magnets. This policy will lead to a          because it is a price         .

The legal restriction on price of $6/magnet is removed. There will be          pressure on prices, and quantity demanded will         .

Solution

1. Equilibrium condition: Qd = Qs

16 - P = 2P - 8

24 = 3P

P = 8

Since government impose ceiling of $ 6 i.e. price lies below equilibrium price of $ 8, it is price ceiling.

Qd = 16 - 6 = 10 units

Qs = 2 x 6 - 8 = 4 units

This implies there is shortage of 10 - 4 = 6 units.

Answer is Shortage; Price ceiling

2. When legal restriction removes then there is pressure on increase in price because equilibrium price is higher.

So, upward pressure and quantity demanded will fall.

Answer is Upward; fall.