Practice Questions to accompany Mankiw & Taylor: Economics 1 Chapter 6 1. Use the following supply and demand schedules for bicycles to answer the questions below. a. In response to lobbying by the Bicycle Riders Association, the government places a price ceiling of €700 on bicycles. What effect will this have on the market for bicycles? Why? Answer: It will have no effect. The price ceiling is not binding because the equilibrium price is €500 and the price ceiling is set at €700.b. In response to lobbying by the Bicycle Riders Association, the government places a price ceiling of €400 on bicycles. Use the information provided above to plot the supply and demand curves for bicycles in Exhibit 1. Impose the price ceiling. What is the result of a price ceiling of €400 on bicycles? Exhibit 1 Answer: See Exhibit 5. The quantity demanded rises to 55 units, the quantity supplied falls to 40 units, and there is a shortage of 15 units.
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