An effective price ceiling usually generates
A) fire sales as firms try to unload their excess inventories.
B) higher nominal prices.
C) the use of nonprice rationing devices.
D) happy sellers and dissatisfied buyers.

Question

Quizplus · Accepted Answer

An effective price ceiling usually leads to a shortage of the product/service, as the price is below the equilibrium price, creating excess demand. In order to ration the limited supply, nonprice rationing devices such as lines, waiting lists, or lotteries are often used. Therefore, choice C is the best answer.

Option A is incorrect because fire sales happen when firms face excess inventories due to a decrease in demand. A price ceiling does not necessarily cause a decrease in demand.

Option B is incorrect because a price ceiling is designed to keep nominal prices low.

Option D is incorrect because while the sellers may be unhappy with reduced profits due to the price ceiling, the buyers could still be satisfied with the lower prices offered.

An Effective Price Ceiling Usually Generates