Question

Why do shortages develop under a binding price ceiling?

A) Because demand exceeds supply at the price ceiling
B) Because supply exceeds demand at the price ceiling
C) Because the government wants to reduce production
D) Because consumers stop buying the good

Answer 1

Price ceilings create shortages because the quantity demanded exceeds the quantity supplied at the lower price set by the government.

Step-by-step explanation:

A price ceiling is a maximum price set by the government that is below the equilibrium price in a market. When a price ceiling is binding, it creates a shortage because the quantity demanded exceeds the quantity supplied at the lower price. This happens because the price ceiling prevents the market price from increasing to the equilibrium level where quantity demanded and quantity supplied are balanced.