Question

Free markets generally result in equilibrium prices at the intersection of supply and demand. This is sometimes interrupted by the government. In these cases, the government passes a law or regulation fixing the "price" above or below what would otherwise be the equilibrium price. 1) Imagine that the government mandated that the highest price that can be charged for a movie ticket is $25. Would that be a price floor or ceiling at today's prices? What impact would it have? Why? 2) Next, provide one real life example of a government imposed price floor or ceiling. How does it work? Do you think the policy is a good one or a poor one?

Answer 1

A maximum price of $25 for a movie ticket would be a price ceiling because it is below the equilibrium price that would be determined by supply and demand. This would result in excess demand or a shortage of movie tickets. Some potential impacts of this price ceiling could be: (a) longer lines for tickets, (b) increased pressure on movie theaters to allocate tickets fairly, (c) a reduction in the quality or quantity of movies produced due to the lower revenue for studios, and (d) the emergence of a black market for movie tickets sold above the price ceiling.

One real-life example of a government-imposed price floor is the minimum wage. In the United States, the federal minimum wage is currently set at $7.25 per hour. This means that employers must pay their workers at least $7.25 per hour worked. The purpose of this policy is to protect workers from being paid excessively low wages by their employers. Supporters argue that it helps to reduce poverty and inequality, while opponents argue that it leads to reduced employment opportunities, particularly for low-skilled workers, as businesses may not be able to afford the higher wages.

Step-by-step explanation: