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

1. In a perfectly competitive market in long-run equilibrium, MC S LRATC a MR=D=AR = P P P D q Q TR = 0paq TC = 0paq

1. In a perfectly competitive market in long-run equilibrium, what would be the immediate results of imposing and enforcing a price ceiling below the equilibrium price of the product? MC S LRATC MR=D=AR = P P P Pc D q Qd Q > Qs Imposing and enforcing a price ceiling lowers the price, this causes quantity demanded to decrease and quantity supplied to increase. When Qd is greater than Qs, this causes a shortage in the market place.

Since all the firms in a perfectly competitive market MC S LRATC MR=D=AR = P P P Pc P1 MR1=D1=AR1=P1 D Qs q Qd Q q1 Since all the firms in a perfectly competitive market are price takers, they will take the ceiling price. Each firm’s output decreases to where MR1 = MC. Each firm will lower its price.

What would be the long-run effect of continuing to enforce the ceiling price, assuming black markets do not develop? S1 S LRATC d c MR=D=AR = P P P b P1 MR1=D1=AR1=P1 Pc D Qd Q Qs q q1 Since firms would be earning below economic profits, TR = 0P1bq1, TC = 0dcq1 Economics profits are less than 0, P1dcb Firms would exit the market.

Be sure to explain why the predicted effects will occur. S1 LRATC d c MR=D=AR = P P P b P1 MR1=D1=AR1=P1 Pc D Qs q Qd Q q1 As firms exit the market the firms in the market would like to charge the market price P1, but since they are forced to charge the Pc, there will be no firms willing to supply at the ceiling price.