Question

3. Refer to Table 1. Which of the following price floors would be binding in this market?

$1
$2
$3
$4

Answer 1

The price ceiling that would be binding on this market can be found to be A. $ 2

When is a price ceiling considered binding ?

A price ceiling is considered binding when it is set below the equilibrium price in a market, and it has legal or regulatory force, meaning that sellers are not allowed to charge prices higher than the ceiling.

In this situation, the price ceiling creates a maximum allowable price for a particular good or service.

In the above situation, the equilibrium price is $ 3 as this is where the Quantity Demanded and Supplied are equal. This means that the price ceiling would have to be less than $ 3 to be binding which is why $ 2 is a binding price ceiling.

Answer 2

Answer: Choice D) $4

Step-by-step explanation:

The term "binding price floor" means "a price that is above equilibrium".

If the floor is at equilibrium or lower, then buyers and sellers will just go for the equilibrium price (as they naturally would have done anyway) and there's no need for the floor. In such cases, the floor is considered non-binding.

As you pointed out in the table, the equilibrium price is $3 where quantity supplied equals quantity demanded. A binding floor price would be $4 since it's above equilibrium.