Assume that the world price of Commodity X is $9 per unit while its domestic price is $8, and the marginal cost of production is $6 per unit.If the government imposes a price ceiling of $7 on domestic output:

Question

Quizplus · Accepted Answer

With a price ceiling of $7 on domestic output, the domestic price is below the marginal cost of production, so domestic producers will not produce the commodity. Therefore, there will be a shortage of Commodity X in the domestic market. Import from the world market may continue if it is still profitable for foreign producers to export at the world price of $9, but domestic consumers will face a shortage at the domestic price of $7. The world price is not affected by the domestic price ceiling.

Assume That the World Price of Commodity X Is $9