A price ceiling will be binding only if it is set
A)equal to the equilibrium price.
B)above the equilibrium price.
C)below the equilibrium price.
D)either above or below the equilibrium price.

Question

Quizplus · Accepted Answer

A price ceiling is a government-imposed limit on how high a price can be charged for a particular good or service. If the price ceiling is set above the equilibrium price, it will not be binding because the market price will already be lower than the government-imposed limit. However, if the price ceiling is set below the equilibrium price, it will create a shortage because the demand for the good or service will exceed the supply at the lower price. Therefore, the only choice that makes sense is C, as a price ceiling will only be binding if it is set below the equilibrium price.

A Price Ceiling Will Be Binding Only If It Is