A price ceiling below equilibrium will cause a larger shortage when demand is _____ and supply is _____.
A)elastic;inelastic
B)inelastic;inelastic
C)elastic;elastic
D)perfectly inelastic;elastic

Question

Quizplus · Accepted Answer

When demand is elastic and supply is also elastic, a price ceiling below equilibrium will cause a larger shortage. This is because a price ceiling puts a legal limit on the price that sellers can charge, which means that the price they receive is lower than the market price. As a result, producers are incentivized to reduce their output, leading to a smaller quantity supplied. At the same time, consumers are encouraged to increase their demand due to the lower price, leading to a larger quantity demanded. When both demand and supply are elastic, the decrease in quantity supplied is greater than the increase in quantity demanded, resulting in a larger shortage.

A Price Ceiling Below Equilibrium Will Cause a Larger Shortage