Paper 1 · November 2010 · price controls
The diagram shows the market demand and supply of a commodity. Where price is set by government,
A indicates an effective maximum price.
B indicates an effective minimum price.
C causes a surplus of the commodity.
D results in increased utilisation of factor inputs.
Explanation
P1 is above equilibrium PE. At P1, supply exceeds demand, creating a surplus. P1 is an effective maximum price only if it is below equilibrium; since P1 is above PE, it is not an effective maximum. P1 causes a surplus — this is correct.
ZIMSEC Economics Paper 1, November 2010, Q6