Question

Suppose that, in a competitive market without government regulations, the equilibrium price of donuts is $1.50 each. 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
1. Due to new regulations, donut shops that would like to pay better wages in order to hire more workers are prohibited from doing so.
2. Price ceiling Binding The government has instituted a legal minimum price of $1.10 each for donuts.
3. Price floor Non-binding The government prohibits donut shops from selling donuts for more than $1.10 each.

Answer 1

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