Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It creates a deadweight loss by reducing the quantity supplied.
B
It increases the total revenue for producers.
C
It leads to a surplus of goods in the market.
D
It ensures that all consumers can purchase the good at a lower price.
Understanding the Answer
Let's break down why this is correct
Answer
When a government sets a price ceiling below the equilibrium price, it means that the maximum price sellers can charge is lower than what the market would normally set based on supply and demand. This can lead to a shortage, where the quantity of goods demanded by consumers exceeds the quantity supplied by producers. For example, if the equilibrium price for a loaf of bread is $2, but the government sets a price ceiling at $1. 50, more people will want to buy bread at the lower price, but bakers may not find it profitable to produce enough bread, leading to empty shelves. This situation creates deadweight loss, meaning that the total economic welfare is reduced because some trades that would have happened at the equilibrium price no longer occur.
Detailed Explanation
When a price ceiling is set below the equilibrium price, it means sellers can't charge as much as they normally would. Other options are incorrect because Some might think that lower prices help producers earn more money; It might seem that a price ceiling would create a surplus, but it actually causes a shortage.
Key Concepts
price ceilings
Topic
Deadweight Loss in Pricing
Difficulty
easy level question
Cognitive Level
understand
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