Figure 4-18 Refer to Figure 4-18. In this market, which of the following price controls would be binding?
A) a price ceiling of $2.00, and it would cause a shortage
B) a price ceiling of $5.00, and it would cause a surplus
C) a price floor of $2.00, and it would cause a shortage
D) All of the above are correct.

Question

Figure 4-18  Refer to Figure 4-18. In this market, which of the following price controls would be binding?
A) a price ceiling of $2.00, and it would cause a shortage 
B) a price ceiling of $5.00, and it would cause a surplus 
C) a price floor of $2.00, and it would cause a shortage 
D) All of the above are correct.

Quizplus · Accepted Answer

A price ceiling is a government-imposed limit on how high a price can be charged for a good, below the market equilibrium price. In this market, the equilibrium price is $3.00 and the equilibrium quantity is 12 units. If the government sets a price ceiling of $2.00, it will be below the market equilibrium price and will cause excess demand (shortage) for the good. Therefore, option A is the correct choice. Option B is incorrect because a price ceiling of $5.00 is above the equilibrium price and is not binding. Option C is also incorrect because a price floor of $2.00 is above the equilibrium price and is not binding. Option D is incorrect because only option A is correct.