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DragIT Maximum prices

Government may set a ceiling for prices below the market equilibrium in order to benefit consumers. This is referred to as a 'maximum' price because suppliers are not allowed to charge a higher price. In the UK, the price of a standard loaf of bread was set by the government right up to the early 1970s. Low maximum prices are often used in developing countries as a means of helping the large numbers of urban poor.

Assume that the domestic market price for wheat is 5 (which is also the world price of wheat). In the diagram below drag the 'low maximum price' line to a level that reduces this country's market price of wheat by 20 per cent.

question

1

Maximum prices

In the above situation which of the following will be true? (Select all those statements which are true)

a)
b)
c)
d)
e)
a) Yes, that's correct. There will be a shortage, but it will be 10,000 tonnes.a) No, that's not right. There will be a shortage, but it will be 10,000 tonnes.b) Yes, that's correct. Original income was 125,000 (5 25,000). New income is 80,000 (4 20,000).b) No, that's not right. Original income was 125,000 (5 25,000). New income is 80,000 (4 20,000).c) Yes, that's correct. Although demand has increased by 20 per cent (from 25,000 to 30,000 tonnes per annum), consumption will fall to 20,000 tonnes as that is all that is being produced (assuming none in store).c) No, that's not right. Although demand has increased by 20 per cent (from 25,000 to 30,000 tonnes per annum), consumption will fall to 20,000 tonnes as that is all that is being produced (assuming none in store).d) Yes, that's correct. Supply would fall from 25,000 to 20,000 tonnes per annum.d) No, that's not right. Supply would fall from 25,000 to 20,000 tonnes per annum.e) Yes, that's correct.e) No, that's not right. The statement is correct.
Check your answer

2

Maximum prices

In the above situation, which of the following will be true? (Select all those statements which are true)

a)
b)
c)
d)
e)
a) Yes, that's correct. The statement is true.a) No, that's not right. The statement is true.b) Yes, that's correct. The statement is true.b) No, that's not right. The statement is true.c) Yes, that's correct. The statement is true.c) No, that's not right. The statement is true.d) Yes, that's correct. The statement is true.d) No, that's not right. The statement is true.e) Yes, that's correct. The statement is true.e) No, that's not right. The statement is true.
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