Question

If the government imposes a price ceiling of $120, the resulting excess demand (or shortage) will be_____________? (Exam 1)

Option 1:
An increase in supply.

Option 2:
A decrease in quantity demanded.

Option 3:
An increase in quantity demanded.

Option 4:
A decrease in supply.

Answer 1

A price ceiling below the equilibrium price causes a shortage.

Step-by-step explanation:

A price ceiling is a legal maximum price set by the government. If the government imposes a price ceiling of $120, it means that the price cannot go above that amount. This price ceiling is below the equilibrium price, which is the price at which the quantity demanded is equal to the quantity supplied in a market.

When a price ceiling is set below the equilibrium price, it will cause the quantity demanded to rise and the quantity supplied to fall. This is because at the lower price, buyers want to buy more of the good or service, while sellers are less willing to supply it. As a result, a shortage will occur.

In the context of this question, the resulting excess demand, or shortage, will be option 3: an increase in quantity demanded.