Refer to Figure 6-2. ?The price ceiling causes quantity
a. ?supplied to exceed quantity demanded by 90 ?units.
b. ?demanded to exceed quantity supplied by 90 ?units.
c. ?demanded to exceed quantity supplied by 30 ?units.
d. ?supplied to exceed quantity demanded by 60 ?units.
The correct answer and explanation is:
The correct answer is:
b. demanded to exceed quantity supplied by 90 units.
Explanation:
A price ceiling is a legal maximum price set by the government that sellers can charge for a good or service. It is typically implemented to prevent prices from rising above a certain level, making goods or services more affordable for consumers. Price ceilings are often set below the equilibrium price, which is the price at which supply equals demand in a free market.
When a price ceiling is imposed below the equilibrium price, the result is typically a shortage. Here’s why:
- Quantity Demanded: Consumers are more willing to purchase a good when the price is lower. The lower the price due to the price ceiling, the higher the quantity demanded. This increase in demand occurs because more consumers can now afford the good at a lower price.
- Quantity Supplied: On the other hand, producers are less willing to supply the good at a lower price. The lower price reduces their potential profit, so they may cut back on production or refuse to supply as much of the good. As a result, the quantity supplied decreases.
- The Shortage: A shortage occurs when the quantity demanded exceeds the quantity supplied. Since the price ceiling causes more people to want to buy the good (increased demand) but fewer producers are willing to supply it (decreased supply), there is an imbalance. The shortage is the difference between the quantity demanded and the quantity supplied.
In the scenario given, the price ceiling causes the quantity demanded to exceed the quantity supplied by 90 units. This is the definition of a shortage — the higher demand at the lower price cannot be met by the reduced supply. Hence, option b is the correct answer.