1. In a perfectly competitive market in long-run equilibrium, what would be the immediate

1. In a perfectly competitive market in long-runequilibrium, what would be the immediate results of imposing and enforcing a price ceilingbelow the equilibrium price of the product? What would be the long-run effect of continuingto enforce the ceiling price, assuming blackmarkets do not develop? Be sure to explain whythe predicted effects will occur.

1. In a perfectly competitive market in long-runequilibrium,

S

D

P

Q

PMR=D=AR = P

MCLRATC

q0

a

TR = 0paqTC = 0paq

1. In a perfectly competitive market in long-runequilibrium, what would be the immediate results of imposing and enforcing a price ceilingbelow the equilibrium price of the product?

S

D

P

Q

PMR=D=AR = P

MCLRATC

q

Pc

Imposing and enforcing a price ceiling lowers theprice, this causes quantity demanded to decrease

Qd

and quantity supplied to increase.

Qs

When Qd is greater than Qs, this causes a shortagein the market place.

>

S

D

P

Q

PMR=D=AR = P

MCLRATC

q

Pc

Qd

Since all the firms in a perfectly competitive market are price takers, they will take the ceiling price.

P1 MR1=D1=AR1=P1

Qs

Each firm will lower its price. Each firm’s output decreases to where MR1 = MC.

q1

What would be the long-run effect of continuingto enforce the ceiling price, assuming blackmarkets do not develop?

S

D

P

Q

PMR=D=AR = P

LRATC

q

Pc

Qd

P1 MR1=D1=AR1=P1

Qsq1Since firms would be earning below economicprofits,

0

b

TR = 0P1bq1,

cd

TC = 0dcq1Economics profits are less than 0, P1dcbFirms would exit the market.

S1

Be sure to explain why the predicted effects will occur.

S

D

P

Q

PMR=D=AR = P

LRATC

q

Pc

Qd

P1 MR1=D1=AR1=P1

Qsq10

b

cd

S1

As firms exit the market the firms in the marketwould like to charge the market price P1,

P1

but since they are forced to charge the Pc, there will be no firms willing to supply at the ceiling price.