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Assume you are a policymaker in Washington DC. Lobbyists for the pre-schoolers of America have put pressure on their representatives to cap prices on...

Assume you are a policymaker in Washington DC. Lobbyists for the pre-schoolers of America have put pressure on their representatives to cap prices on graham crackers. You have been assigned a position on a new committee to study the impact of a price ceiling on graham crackers. A price ceiling is a maximum price that can be charged. This is set BELOW the equilibrium price.

Your job is to:
a.) Illustrate using a supply and demand graph what such an artificial price looks like.
b.) Explain what the results of such a move are for the graham cracker market. In other words, will there be a SHORTAGE, a SURPLUS, or neither created?
c.) Finally, what are the impacts of this price ceiling for those who wish to purchase graham crackers? (In other words, what is the unintended consequence of this action?) Given that there is a max price set, it will only be affordable to produce a certain number in order to be cost effective for the manufacturer. Which, in turn, will create a shortage.
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8528435.doc

a.
The situation is shown in diagram above. Equilibrium is where demand equals supply, at
P*. The price set is below P* at Pc.
b.
At Pc demand > supply, which implies shortage will develop....

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