CA Foundation · Business Economics · Theory of Demand and Supply
The market for a commodity has demand Qd = 500 − 10P and supply Qs = 100 + 10P. The government imposes a price ceiling at ₹15. What is the result?
The ceiling creates a shortage of 100 units. Equilibrium price is ₹20, so a ceiling at ₹15 binds. At ₹15 consumers demand 350 units but producers supply only 250 units, leaving excess demand of 100 units.
- ASurplus of 100 units
- BShortage of 100 unitsCorrect
- CShortage of 200 units
- DMarket clears at 350 units
Explanation
Equilibrium: 500 − 10P = 100 + 10P gives P = 20, Q = 300. The ceiling of ₹15 is below equilibrium so it binds. Qd = 500 − 150 = 350 and Qs = 100 + 150 = 250. Shortage = 350 − 250 = 100 units. Market clearing at 350 is wrong because suppliers offer only 250.
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