Why do shortages develop under a binding price ceiling?
A) It encourages sellers to produce more of the product.
B) It encourages buyers to purchase less of the product.
C) It makes the price so low that the quantity demanded exceeds the quantity supplied in the legal market.
D) It makes the price so low that the quantity demanded exceeds the quantity supplied on the black market.
E) It encourages sellers to increase the quality of the product they sell, which, in turn, increases the quantity demanded.

Question

Quizplus · Accepted Answer

A binding price ceiling sets the legal price below the equilibrium price, leading to an increase in the quantity demanded and a decrease in the quantity supplied. As a result, a shortage develops because the quantity demanded exceeds the quantity supplied in the legal market. The black market may develop, but it is not a necessary consequence of a binding price ceiling. Choices A, B, and E do not accurately describe the impact of a binding price ceiling on shortages.

Why Do Shortages Develop Under a Binding Price Ceiling