Final answer:
A price ceiling set above the equilibrium price will have no effect since it is non-binding. A price ceiling below equilibrium creates a shortage, and the greater this discrepancy, the larger the effect. A price floor above equilibrium causes a surplus, with more significant effects as the floor is set higher above equilibrium.
Step-by-step explanation:
Observations consistent with the imposition of a price ceiling that is higher than the equilibrium price would show no change in market behavior since the ceiling does not constrain the natural dynamics of the market. A price ceiling set above the equilibrium price would be non-binding and ineffectual, maintaining the existing market equilibrium where demand equals supply.
However, if the price ceiling were below the equilibrium, it would become a binding constraint, leading to a shortage where the quantity demanded (Qd) exceeds the quantity supplied (Qs), and reducing the number of transactions to the level of Qs.
If the student's question refers to the effects of a price ceiling when established, the main observation would be that a price ceiling set below equilibrium price would have the largest effect, in line with answer choice (a), and it would create a shortage in the market. A price ceiling set substantially below the equilibrium price would lead to a larger shortage and more significant market distortion than one set slightly below.
Drawing a graph would show that for a price floor to have the largest effect, it would need to be set substantially above the equilibrium price, which causes a surplus (excess supply). This is because sellers are willing to supply more than buyers are willing to purchase at that higher price, creating excess inventory.