Answered: Consider the market depicted in the…

MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

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Question

Consider the market depicted in the graph and assume the government imposes a price floor of P2. At P2, 150 units of the good are supplied (wish to be sold) and 50 units of the good are demanded (wish to be bought). Choose the correct ones: Without an enforcement mechanism, the effect of a binding price floor will be negligible because it will simply be ignored because buyers and sellers enrich themselves by trading below the floor price. With an enforcement mechanism, the effect of a binding price floor may still be negligible if the enforcement mechanism is easy to evade or doesn't impose a significant penalty for selling below the price floor. Without an enforcement mechanism, the effect of a binding price floor will be negligible because it will simply be ignored because buyers and sellers enrich themselves by trading above the floor price. With an enforcement mechanism, the effect of a binding price floor may still be negligible if the enforcement mechanism is easy to evade or doesn't impose a significant penalty for selling above the price floor. The more the price floor is above the market price, the greater the incentive of buyers and sellers to ignore regulation of price. The more the price floor is below the market price, the greater the incentive of buyers and sellers to ignore regulation of price. If the price flooor can be effectively enforced, some buyers will be able to purchase the good at the regulated price and some will not. If the price floor can be effectively enforced, a rationing method will have to be used to allocate the supply of the good at the regulated price among potential buyers. If the price floor can be effectively enforced and no rationing method is used, the allocation of the good among potential buyers will be random and unpredictable.