1. In a perfectly competitive market in long-run

1
1. In a perfectly competitive market in
long-run equilibrium, what would be the immediate
results of imposing and enforcing a price
ceiling below the equilibrium price of the
product? What would be the long-run effect of
continuing to enforce the ceiling price, assuming
black markets do not develop? Be sure to explain
why the predicted effects will occur.
2
1. In a perfectly competitive market in
long-run equilibrium,
MC
S
LRATC
P
MRDAR P
a
P
D
0
Q
q
TR
0paq
0paq
TC
3
1. In a perfectly competitive market in
long-run equilibrium, what would be the immediate
results of imposing and enforcing a price
ceiling below the equilibrium price of the
product?
MC
S
LRATC
P
MRDAR P
P

Pc
D
Q
Qd
Qs

q
gt
Imposing and enforcing a price ceiling lowers
the price,
this causes quantity demanded to
decrease
and quantity supplied to increase.
When Qd is greater than Qs, this causes a
shortage in the market place.
4
MC
S
LRATC
P
MRDAR P
P

Pc
MR1D1AR1P1
P1
D
Qs
Q
Qd

q
q1
Since all the firms in a perfectly competitive
market are price takers, they will take the
ceiling price.
Each firm will lower its price.

Each firms output decreases to where MR1
MC.
5
What would be the long-run effect of
continuing to enforce the ceiling price, assuming
black markets do not develop?
S1
S
LRATC
c
d
P
MRDAR P
P

b
Pc
MR1D1AR1P1
P1
D
0
Qs
Q
Qd


q
q1
Since firms would be earning below
economic profits,
TR 0P1bq1,
TC 0dcq1
Economics profits are less than 0, P1dcb
Firms would exit the market.
6
Be sure to explain why the predicted effects will
occur.
S1
S
P1
LRATC
c
d
P
MRDAR P
P

b
Pc
MR1D1AR1P1
P1
D
0
Qs
Q
Qd


q
q1
As firms exit the market the firms in the
market would like to charge the market price P1,
but since they are forced to charge the Pc, there
will be no firms willing to supply at the
ceiling price.