The following table shows the demand for,and supply of,soya milk in a particular market (the quantities are in thousands of liters per day):

-Refer to the above information to answer this question.Suppose that the government introduces an effective price ceiling which is 20 cents different from the equilibrium price and as a result an illegal market develops.What will be the illegal market price?

Question

The following table shows the demand for,and supply of,soya milk in a particular market (the quantities are in thousands of liters per day):
 
-Refer to the above information to answer this question.Suppose that the government introduces an effective price ceiling which is 20 cents different from the equilibrium price and as a result an illegal market develops.What will be the illegal market price?

Quizplus · Accepted Answer

The equilibrium price is $2.30, where the demand and supply curves intersect. If the government introduces a price ceiling 20 cents lower than the equilibrium price, the new legal price would be $2.10. This would create excess demand (quantity demanded - quantity supplied), which in this case is 1000 - 700 = 300. This excess demand would lead to a shortage, which would create opportunities for an illegal market to develop. The illegal market price would be higher than the legal price, but lower than the equilibrium price, since buyers would not be willing to pay more than $2.30 (the equilibrium price). The illegal market price would be somewhere between $2.10 and $2.30. The only choice in this range is B, $2.20. Therefore, the answer is B.

The Following Table Shows the Demand For,and Supply Of,soya Milk