A Binding Price Ceiling is a regulated price below the market price.
A Non-Binding Price Ceiling is a regulated price above the market price
A Binding Price Floor is a regulated price above the market price.
A Non-Biding Price Floor is a regulated price below the market price.
Choose all that are correct.
A Price Floor is a law or regulation that sets a minimum price.
A Price Floor is a law or regulation that sets a maximum price.
A Price Ceiling is a law or regulation that sets a minimum price.
A Price Ceiling is a law or regulation that sets a maximum price.
A Price Ceiling set above the current market price is binding.
A Price Ceiling set above the current market price is not binding.
A Price Ceiling set below the current market price is binding.
A Price Ceiling set below the current market price is not binding..
A Price Floor set above the current market price is binding.
A Price Floor set below the current market price is binding.
A Price Floor set below the current market price is not binding.
A Price Floor set above the current market price is not binding.
The correct answer and explanation is :
The correct answers are:
- A Price Floor is a law or regulation that sets a minimum price.
- A Price Ceiling is a law or regulation that sets a maximum price.
- A Price Ceiling set above the current market price is not binding.
- A Price Ceiling set below the current market price is binding.
- A Price Floor set above the current market price is binding.
- A Price Floor set below the current market price is not binding.
Explanation:
Price Floors and Price Ceilings are regulatory measures implemented by governments to control prices in markets.
- A Price Floor is a minimum allowable price that can be charged for a good or service. It ensures that prices do not fall below a certain level. For example, minimum wage laws establish a price floor in labor markets. A binding price floor occurs when the regulated price is above the market equilibrium price, causing a surplus (e.g., more workers available than there are jobs). On the other hand, a non-binding price floor occurs when the regulated price is below the market price, and thus, it has no effect on the market.
- A Price Ceiling is a maximum allowable price for a good or service. Governments set price ceilings to prevent prices from rising too high, such as rent controls or caps on essential goods during emergencies. A binding price ceiling occurs when the regulated price is below the market equilibrium price, resulting in a shortage (e.g., fewer goods available than consumers want to buy). A non-binding price ceiling occurs when the regulated price is above the market price, meaning the ceiling does not restrict the price and thus has no effect.
To summarize:
- Binding means the regulation is set in a way that affects the market, either by creating a shortage (in the case of a price ceiling below the market price) or a surplus (in the case of a price floor above the market price).
- Non-binding means the regulation does not affect the market because it is set outside the relevant market price range.
Here is a visual diagram illustrating the concepts of price ceilings and price floors. It shows how a price ceiling set below the market equilibrium price leads to a shortage, while a price floor set above the market price creates a surplus.