Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases producer surplus by allowing higher prices.
B
It decreases producer surplus by creating a market distortion.
C
It has no effect on producer surplus.
D
It only affects consumer surplus.
Understanding the Answer
Let's break down why this is correct
Answer
A price ceiling is a limit set by the government on how high a price can be charged for a product. When a price ceiling is implemented, it usually causes the price of the product to drop below what it would normally be in a free market. This lower price can make it harder for producers to cover their costs, which means their profit or surplus decreases. For example, if the ceiling on rent is set below the market price, landlords may earn less money, reducing their overall surplus from renting properties. As a result, the producer surplus shrinks because producers can’t sell their goods at higher prices that would allow them to maximize their earnings.
Detailed Explanation
A price ceiling sets a maximum price that can be charged. Other options are incorrect because Some might think that higher prices mean more profit; It's a common mistake to think price ceilings have no effect.
Key Concepts
Producer surplus
Market distortion
Topic
Price Ceilings and Market Outcomes
Difficulty
medium level question
Cognitive Level
understand
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