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Chapter 3: Q. 10 (page 78)

Does a price ceiling increase or decrease the number of transactions in a market? Why? What about a price floor?

Short Answer

Expert verified

Transactions will decrease in both the cases.

Step by step solution

01

Part(a)Step1. Concept 

Price ceiling is fixed below the equilibrium price to ensure the prices do not exceed the fixed level through government intervention.

02

Part (a)Step2. Explanation

When the prices are fixed below the equilibrium level, the quantity supplied in the market at this price ceiling will be less as compared to at equilibrium level. This implies that the number of transactions will now reduce and hence equate to the quantity supplied at the price ceiling level.

03

Part(b)Step1. Concept

Price floor is fixed above the equilibrium level when the equilibrium price is low and hence a minimum level through government intervention is needed to be ensured.

04

Part(b)Step2. Explanation

When the prices are fixed above the equilibrium level, the demand will fall as compared to at the equilibrium price. This implies that the number of transactions will now reduce due to low demand and hence equate to the quantity demanded at the price floor level.

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Does a price ceiling change the equilibrium price?

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