Consider a price ceiling imposed on a monopoly that is set below the competitive price. Design a diagram showing the monopoly equilibrium in this case. Use your diagram to show that a price ceiling set this low will create a shortage.

What will be an ideal response?


The competitive price occurs where the marginal cost curve crosses the demand curve. If a price ceiling is set below this level, then the marginal cost curve will cross the new marginal revenue curve on its horizontal segment, beneath the demand curve. This makes the quantity supplied less than the quantity demanded, causing a shortage. This situation is illustrated in the accompanying diagram.



Economics

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