Which of the following statements about a binding price ceiling is true?

• A. A binding price ceiling leads to a shortage in the market.
• B. A binding price ceiling has no effect if set above the equilibrium price.
• C. A binding price ceiling causes the equilibrium price to rise above the ceiling.
• D. A binding price ceiling results in a surplus of goods.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what a price ceiling is. A price ceiling is a legal maximum price that sellers can charge for a good or service.
2. Step 2: Identify what makes a price ceiling binding. A price ceiling is binding if it is set below the market equilibrium price, meaning it restricts the price from rising to its natural equilibrium level.
3. Step 3: Analyze the effects of a binding price ceiling. Since the price is kept below equilibrium, the quantity demanded will increase while the quantity supplied will decrease, leading to a shortage.
4. Step 4: Consider what happens if the price ceiling is set above the equilibrium price. In this case, the ceiling is non-binding and has no effect because the market price naturally stays below the ceiling.
5. Step 5: Evaluate the incorrect statements: a binding price ceiling does not cause the equilibrium price to rise above the ceiling, nor does it result in a surplus; instead, it causes a shortage.