A price ceiling below the market clearing price results in I. excess quantity demand
II) excess quantity supplied
III) entry of new producers
A) I only
B) II only
C) III only
D) Both I and III

Question

Quizplus · Accepted Answer

A price ceiling is a legal maximum price set by the government. When the price ceiling is below the equilibrium price (market clearing price), it creates excess quantity demand, as consumers demand more at the lower price point than suppliers are willing to provide. This creates shortages in the market. Therefore, only statement I is correct. Excess quantity supplied and entry of new producers occur when the price floor is set above the market clearing price.

A Price Ceiling Below the Market Clearing Price Results in I