Based on economic principles of supply and demand, what is the most predictable market consequence when a government imposes a binding legal price ceiling below the market equilibrium price of a consumer good?
Answer and explanation
Correct answer: D. A persistent market shortage where quantity demanded exceeds quantity supplied
- Step 1: Apply microeconomic price controls theory: At an artificial price below equilibrium, suppliers produce less because margins shrink.
- Step 2: Concurrently, consumers demand more at the discounted price, creating an imbalance where , which manifests as a chronic shortage.
Answer
A persistent market shortage where quantity demanded exceeds quantity supplied.
Why not the others: 'Market surplus' occurs with a price floor above equilibrium; 'Rapid increase in capital investment' is deterred by reduced profitability; 'Collapse in consumer demand' is opposite to the law of demand.
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