Refer to the accompanying figure, which shows both short-run and long-run demand
ID: 1128575 • Letter: R
Question
Refer to the accompanying figure, which shows both short-run and long-run demand and supply curves. If there is a $4 binding price floor imposed on a pharmaceutical drug, what will be the amount of the disequilibrium in the short run?
A.There will be a surplus of 1,500,000 units.
B. There will be a surplus of 800,000 units.
C. There will not be a surplus; there will be a shortage.
D. There will be a surplus of 2,000,000 units.
E. There will be a surplus of 500,000 units.
Explanation / Answer
If there is a binding price floor i.e a price ceiling, then there can never be a surplus as at a price lower than the equilibrium price, demand will always exceed supply which will lead to a shortage. Hence there will be a shortage of 800000 units i.e the difference between S1 and D1 at $4.