The mayor of Stockville is seeking reelection and isn't buying into the health food hype.He believes that french fries are necessary for the happiness of his citizens,but the fast-food restaurants in his city are charging too much for their products.In an effort to shore up election support,the mayor institutes a price ceiling on french fries.Within two years,half of the fast-food restaurants close in Stockville.What is the likely cause?

Question

Quizplus · Accepted Answer

The price ceiling on french fries likely caused half of the fast-food restaurants to close in Stockville because it generated long-run economic losses. When prices are artificially set below the equilibrium level, it leads to excess demand and a shortage of supply. This shortage may eventually lead to a decrease in production and even to business closure. Therefore, in this case, the price ceiling on french fries likely caused the fast-food restaurants to face the problem of not being able to charge a price that covered their costs, leading them to close down.

The Mayor of Stockville Is Seeking Reelection and Isn't Buying