Under a binding price ceiling, one expects the quality of a good to:
A) rise.
B) remain the same.
C) fall.
D) change in an indeterminate direction.

Question

Quizplus · Accepted Answer

When a binding price ceiling is imposed, the price of a good is limited to a certain level. However, the cost of producing the good has not changed, so producers will be reluctant to produce as much of it as they would if they could receive a higher price. As a result, there will be a shortage of the good. When a shortage occurs, sellers will have an incentive to lower the quality of the good in order to reduce their costs and increase their profit margins. Hence, the quality of a good is expected to fall under a binding price ceiling.

Under a Binding Price Ceiling, One Expects the Quality of a Good