Question

Indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding.

a. There are many teenagers who would like to work at fast-food restaurants, but they are not hired due to minimum-wage laws.
b. The government prohibits fast-food restaurants from selling hamburgers for more than $5 each.
c. The government has instituted a legal minimum price of $5 each for hamburgers.

Answer 1

For this question assume that the equilibrium price for hamburgers is $7.

A Price ceiling on a good means that no price higher than the one mandated should be charged. Binding price ceiling means that the price ceiling is lower than the equilibrium price.

A Price floor means that no price should be charged that is lower than the mandated price. Binding price floor means that the price floor is higher than the equilibrium price.

a. Binding Price Floor

Minimum wage laws are price floors because they represent a minimum price that can be charged for labor. One cannot go below this price thereby making it a price floor. It is a binding price floor because it is higher than the Equilibrium price for labor. This is why people are not hiring the teenagers.

b. Binding Price Ceiling

The government has given a maximum price that can be charged for hamburgers. This makes it a price ceiling. It is binding because it is lower than the equilibrium price of $7..

c. Non-binding Price Floor

This is a minimum price which means that it is a price floor. It is non-binding because this price floor is lower than the equilibrium price of $7.