Assume a competitive industry produces widgets using labor and capital in fixed proportions.Both input supply curves slope upward.The government considers the equilibrium price of widgets to be too high and imposes a price ceiling that is below the equilibrium price.Which of the following is most likely to occur?
A)The sales of widgets will increase and the prices and employment of both inputs will rise.
B)The sales of widgets will decline and the prices and employment of both inputs will remain unchanged.
C)The sales of widgets will decline and the prices and employment of both inputs will fall.
D)The sales of widgets will increase and the prices and employment of both inputs will fall.

Question

Quizplus · Accepted Answer

When a price ceiling is imposed below the equilibrium price, the quantity demanded exceeds the quantity supplied, creating a shortage. In this case, the sales of widgets will decline because producers are willing to supply less than the quantity demanded at the reduced price. As a result, the prices and employment of both inputs will fall because producers are reducing their production levels and demand for inputs. This is because labor and capital are fixed in proportion to each other, so a decrease in widget production will lead to a decrease in demand for both labor and capital.

Assume a Competitive Industry Produces Widgets Using Labor and Capital