Consequences that would result from the fixing of maximum retail prices

Question 1: Proponents of the free market claim that Government intervention to fix a maximum selling price for certain commodities and a minimum wage for workers in certain trades cause serious ‘market distortions' while Government finds good reason to take such actions. You are required to:

(a) State 3 unfavourable consequences that would result from the fixing of maximum retail prices, supporting your answer with the relevant diagram.

Answer:

Three unfavourable consequences that would result from the fixing of maximum retail prices are given as below:

• Due to fixing of a maximum retail prices for some of the commodities by government, a shortage of such commodities will persist in the economy as the demand is greater than supply for such commodities. From the above diagram, it can be said that at price of 2000, the quantity supplied is 20000 units and quantity demanded is 40000 units and thus a shortage of 20000 units.
• Due to shortage of goods, there will be an increase in rationing costs. It means the people has to stand in a ration queue for a long time to purchase the said commodities. Hence, it will create a disturbance for the people living within the economy.
• The development of illegal market is quite possible due to persistent shortage of commodities from the market. Some traders try to hoard the commodities so that they can sell it to the people who are likely to pay higher price for the said commodities. Due to such illegal market, the people who cannot afford to pay such higher price suffer severely.

(b) State 2 negative effects that would flow from the fixing of minimum wages, supporting your answer with the relevant diagram.

Answer b.

Two negative effects that would flow from the fixing of minimum wages are given as below:
• With the fixing of minimum wages, the businesses would be forced to lay off some employees which leads to an increase in unemployment rate. As profit making remains same for the businesses, they are forced to terminate the service of some employees to maintain the business performance.
• With more unemployment rate, the poverty within the society raises and standard of living falls down significantly. From the above diagram, it can be said that quantity supplied of labour is 50,000 but demand is only 32,000 and thus creating a shortage of job for 18000 employees. In this way, fixation of minimum wages works against the welfare of society.

c) State 2 reasons justifying Government's actions in each of these two areas Part a.

Answer c.
2 reasons justifying Government's actions in each of these two areas are given as below:
I. Fixation of maximum retail prices:
• A fixation of maximum retail helps the exploitation of public from the hand of greedy grocer who may charge higher prices for the goods.
• A fixation of maximum retail helps to bring an atmosphere of equality in the society where all people are charged equally and thus the people can use the remaining savings to spend on other productive resources.
II. Fixation of minimum wages:
• A fixation of minimum wages would prevent the exploitation of poor employees from the hand of rich employers. It will create a sense of equality among all employees and thus they can raise standard of living
• A fixation of minimum wages help the poor employees to get a reasonable or competitive wages against their works and help them to increase consumption expenditure.

Related:

Consequences of fixing maximum retail prices

How the Economies of Scale reduce the unit cost

Discuss the role of Central Bank of Sri Lanka

Recommendations to increase the government revenue

Related :-

Q Planning phase of the audit planning phase of the audit - explain why this is an essential part of the audit process and provide examples of the typical audit procedures auditor perform

Q Conflict of interest situations conflict of interest situations - provide examples of where conflict of interest situations could emerge and explain how this affects auditor independence

Q Discussing how the coagulation pathways are controlled by270 human biochemistry and metabolism - discussing how the coagulation pathways are controlled

Q Metformin is a commonly used diabetic drug by270 human biochemistry and metabolism-Based on the literature, fructose 1,6-bisphosphatase (FBPase) is a potential target for metformin.

Q How protein/amino acid metabolisand energy metabolism are interlinked BY270 Human Biochemistry and Metabolism - Discuss how protein/amino acid metabolisand energy metabolism are interlinked

Q Explain how the evaluation of audit evidence acquired Explain how the evaluation of audit evidence acquired and the conclusions made will affect the overall audit.

Q Understanding of the client is crucial to the risk assessment process mpa510 auditing and assurance services - Discuss any gaining an understanding of the client is crucial to the risk assessment process.

Q Evaluating the auditor - client relationship at assurance engagement, it's essential that the auditor evaluate whether it is appropriate and prudent for the auditor to continue providing assurance service

Q Identify and briefly describe any five aspects of competitive analysis busm067 advanced management accounting - identify and briefly describe any five aspects of competitive analysis

Q Role of institutional investor in corporate governance busm060 corporate governance - evaluate the importance and effectiveness of the role of institutional investor in corporate governance and firm performance.