1 . The language of price controls Suppose that, in a competitive market without government regulations, the equilibrium price of rental cars is $58 per day. Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding. Statement Price Control Binding or Not Due to new regulations, car-rental companies that would like to pay better wages in order to hire more workers are prohibited from doing so. The government prohibits car-rental companies from renting out rental cars for more than $36 per day. The government has instituted a legal minimum price of $87 per day for rental cars.

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The language of price controls Suppose that, in a competitive market without government regulations, the equilibrium price of rental cars is $58 per day.

Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding.

Statement: Price Control, Binding or Not.

1. Due to new regulations, car-rental companies that would like to pay better wages in order to hire more workers are prohibited from doing so.

2. The government prohibits car-rental companies from renting out rental cars for more than $36 per day.

3. The government has instituted a legal minimum price of $87 per day for rental cars.

ANSWER: 1. The statement is a PRICE CEILING and BINDING.

2. The statement is a PRICE CEILING and NOT BINDING.

3. The statement is a PRICE FLOOR and BINDING.

EXPLANATION:

1. The statement is a PRICE CEILING and BINDING. This is a price ceiling, because the government has set a maximum limit that cannot be exceeded in payment of wages. This is binding because it is a regulation, that's means it has passed through the legal chambers before it was instituted.

2. The statement is a PRICE CEILING and NOT BINDING. This is a price ceiling because the government has set a maximum limit of $36 per day for car rental companies, and prohibit any company that rents out car above the set limit. This is not binding because it is a declaration by the government political activities, plans and intentions, which does not have a legal background. Therefore it can be easily changed by a new government.

3. The statement is a PRICE FLOOR and BINDING. This statement is a price floor because the government set a minimum limit or benchmark of price to be $87 per day. Therefore no company is required to sell below the limit. This is binding because it is legal, that means it has passed through the legal chambers before is was instituted.

A binding statement is a legal agreement between two parties, that helps to regulate their activities. For a statement to be binding it must be legally instituted.

Price ceiling is the maximum price a goods or services can be sold. This is set by the government or organization in other to regulate the selling of such goods or services.

Price floor is the minimum amount a dealer is willing to sell a goods or services. This is also set by the government, or the organization is other to regulate the price of the goods or services.

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