In a market, demand is q = 200 - 2p and supply is q = 2p - 40. The government fixes a price ceiling of Rs 50.
A. Under the ceiling, 60 units are bought and sold.
B. If demand rises by 20 units at every price, the shortage rises from 40 to 60 units.
C. If demand rises by 20 units at every price, the quantity sold under the ceiling rises to 70 units.
D. If demand rises by 20 units at every price, the market price without the ceiling would be Rs 65.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → A, B and D only
A price ceiling below the equilibrium price creates excess demand (a shortage). Consumers can buy only what firms supply at the ceiling, so the quantity sold is the quantity supplied.
Equilibrium without the ceiling:
\( 200 - 2p = 2p - 40 \)
\( 4p = 240 \)
\( p = 60 \)
The ceiling of Rs 50 is below Rs 60, so it binds. At Rs 50, supply = 60 and demand = 100.
A. Under the ceiling, 60 units are bought and sold. — Correct. Firms supply only 2 × 50 − 40 = 60 units.
B. If demand rises by 20 units at every price, the shortage rises from 40 to 60 units. — Correct. The shortage was 100 − 60 = 40. New demand at Rs 50 is 120, so it becomes 120 − 60 = 60.
C. If demand rises by 20 units at every price, the quantity sold under the ceiling rises to 70 units. — Incorrect. Supply at Rs 50 is still 60, so sales stay at 60 units.
D. If demand rises by 20 units at every price, the market price without the ceiling would be Rs 65. — Correct. From 220 − 2p = 2p − 40, 4p = 260 and p = 65.
NCERT (2026-27): “5.2.1 Price Ceiling Figure 5.7 shows the market supply curve SS and the market demand curve DD for wheat. The equilibrium price and quantity of wheat are p* and q* respectively. When the government imposes price ceiling at cp which is lower than the equilibrium price level, there will be an excess demand for wheat in the market at that price. The consumers demand qc kilograms of wheat whereas the firms supply c q ‘ kilograms.” “Hence, though the intention of the government was to help the consumers, it could end up creating shortage of wheat. How is the quantity of wheat (q’c) then distributed among the consumers? …” |