The mayor of Stockville is seeking reelection and isn’t buying into the health food hype. He believes that french fries are necessary for the happiness of his citizens, but the fast-food restaurants in his city are charging too much for their products. In an effort to shore up election support, the mayor institutes a price ceiling on french fries. Within two years, half of the fast-food restaurants close in Stockville. What is the likely cause?

a. A neighboring town is subsidizing french fry producers.

b. The price ceiling generated long-run economic losses.

c. A spike in french fry consumption resulted in a long-run decline in health, drastically reducing demand for fast food.

d. A french fry price ceiling without a proportional hamburger price floor created an untenable production balance.

e. The price ceiling generated long-run economic profits.

b.The price ceiling generated long-run economic losses.

Explanation: Price ceiling is a form of price control, a governmental restriction on prices that can be charged for goods and services in the market. A price ceiling is the maximum amount a producer is allowed to charge for goods and services that help make them affordable for consumers in the short term. However, due to increased demand (when price ceiling is set below equilibrium price) shortages may ensue (demand exceeding supply) in addition to production of lower quality products, extra charges etc. Firms may not make enough revenue to remain in business too. Hence in the long-run the price ceiling generated long-run economic losses putting most fast-food restaurants out of business.

B. The price ceiling generated long run economic losses.

Explanation:

Price ceiling is a way to control and fix a bar on the maximum price a producer can charge for its product. Now since the french fries are linked to the happiness of the consumers, the demand would increase for french fries as the price in now controlled by the government. This increased demand will not be able to cater by the producers as the productions costs for them will also increase and thus there will be long run economic losses for the producers.

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