If a store sells a good at the market price, even though the government authorities have set the maximum price that can be charged for it, the store is selling the good in a(n):
a. black market for a market price that is higher.
b. black market for a market price that is lower.
c. effort to eliminate a surplus of the good.
d. legal market for a market price that is higher.
e. legal market for a market price that is lower.
The correct answer and explanation is:
The correct answer is d. legal market for a market price that is higher.
When a government sets a maximum price for a good, this is often referred to as a price ceiling. A price ceiling is established to protect consumers from excessively high prices. However, if the market price of the good naturally exceeds this ceiling due to demand and supply conditions, the good will be sold at the ceiling price, even though the market price might be higher. In some cases, the store might still sell the good at the higher market price under the condition of being part of a legal market, as long as the good is sold for the regulated maximum price.
The issue arises when the market price is higher than the ceiling price, causing potential inefficiencies. In such cases, the good may be in short supply, and consumers might have difficulty purchasing it at the regulated price. In response, some sellers may still charge higher prices, but this would be an illegal transaction in a black market. However, if the store adheres to the maximum price set by the government, it is selling the good within the legal market.
This situation is common in instances where the government imposes price controls to avoid inflation, for instance, in housing markets or basic consumer goods during times of crisis. Sellers may not legally charge more than the price ceiling; however, if they attempt to circumvent these regulations through alternative methods (such as selling goods in bulk or bundled offers), they might be engaging in illegal practices.
In summary, the store is selling the good at the price ceiling within the legal market but under a scenario where the market price is typically higher.