Question

A binding price ceiling creates?

1) a shortage or a surplus depending on whether the price ceiling is set above or below the equilibrium price.
2) a surplus.
3) a shortage.
4) an equilibrium.

Answer 1

A binding price ceiling set below the equilibrium price leads to a shortage as the quantity demanded exceeds the quantity supplied.

Step-by-step explanation:

A binding price ceiling creates a situation where the quantity demanded for a good rises, and the quantity supplied falls.

This occurs because the price ceiling is set below the equilibrium price in the market. Consequently, a shortage develops, as there is more demand for the product at the capped price than there is supply. Setting a price ceiling below the equilibrium disrupts the natural balance of the market and prevents prices from rising to a level where supply would equal demand, which is known as the equilibrium.