Read the passage carefully and answer the questions based on the passage:
Concept of Price Ceiling
It is not very uncommon to come across instances where the government fixes a maximum allowable price for certain goods. The government-imposed upper limit on the price of a good or service is called a price ceiling. A price ceiling is generally imposed on necessary items like wheat, rice, kerosene, sugar etc. The objective of the price ceiling is to restrict the price of a good so that it becomes affordable for consumers to buy. However, it does not always generate the desired results. Most of the time, intervention by the government in the form of a price ceiling leads to various socio-problems.
The market determined price of a good is Rs. 40.The government determines the price ceiling on the good as Rs. 25. Calculate the excess demand/excess supply it will cause if the demand and supply functions are Qd = 200 - p and Qs = 120 + p respectively.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Excess demand for 30 units.
Given:
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Price ceiling = ₹25
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Demand function: Qd=200−p
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Supply function: Qs=120+p
Step 1: Calculate quantity demanded and supplied at the price ceiling : At p=25
Qd=200−25=175
Qs=120+25=145
Step 2: Find excess demand
Excess Demand=Qd−Qs =175−145 =30