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    government-imposed price ceiling

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    Earlier this year the rising price of tortillas resulted in major protests in Mexico City combined with a warning from the Mexican central bank that this may fuel rising inflation. In response the President of Mexico announced that the government will be setting a price ceiling on the price of corn. [Corn is the major ingredient in tortillas, and there are millions of poor people in Mexico who survive largely on tortillas and beans. Some Mexicans are said to spend more than a quarter of their daily income on tortillas.] The President of Mexico lashed out saying, "we will not tolerate speculators and monopolists."

    The New Your Times correspondent pointed out that many economic analysts have concluded that price of corn in Mexico has been rising because of the spiraling increase in demand for corn in the Unite States for use in the production of ethanol. (See Question B above)

    A Mexican small tortilla maker is quoted as saying: "Look, we can't give our product away because we need a profit, and if they raise the cost of corn, there's no other way."

    Assuming a purely competitive market for corn, what are the likely effects in Mexico of a government-imposed price ceiling on the price of corn on:

    a. price of corn
    b. demand for corn
    c. market for corn

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    Solution Preview

    a. The price of corn will surely drop because of the price ceiling. This means no matter what the market demand for and supply of corn is, the price of corn cannot exceed the ceiling.

    b. From the diagram, we can see that when the price ...

    Solution Summary

    The effects in Mexico of a government-imposed price ceiling are depicted.