Suppose the market clearing price for gasoline is $4.75 per gallon. Now suppose that policy makers pass a law requiring that the maximum price that can be charged is $3.75 per gallon. Such a situation is an example of
A) a price control that will lead to a surplus of gasoline on the market.
B) a price floor that will lead to a shortage of gasoline on the market.
C) a price ceiling that will lead to a shortage of gasoline on the market.
D) a price floor that will lead to a surplus of gasoline on the market.

Question

Quizplus · Accepted Answer

A price ceiling is a legal maximum on the price at which a good can be sold. In this case, the maximum price that can be charged for gasoline is $3.75, which is lower than the market clearing price of $4.75. This will create a shortage of gasoline on the market, as the quantity demanded will exceed the quantity supplied at the lower price.

Suppose the Market Clearing Price for Gasoline Is $4