Which statement best explains how regulations on prices, such as price ceilings and price floors, affect business practices?

• A. Price regulations have no impact on business practices because market forces always override government intervention.
• B. Price regulations eliminate the need for businesses to compete, as all prices are set by the government.
• C. Price regulations always ensure that businesses maximize profits by setting prices above equilibrium.
• D. Price regulations can lead to shortages or surpluses, prompting businesses to alter production, ration goods, or seek alternative markets.

Answer: (D)

Verified step by step guidance

1. Understand the concept of price regulations: Price ceilings are legal maximum prices set below the equilibrium price, while price floors are legal minimum prices set above the equilibrium price.
2. Analyze the effects of price ceilings: When a price ceiling is set below the equilibrium price, it typically causes a shortage because the quantity demanded exceeds the quantity supplied at that price.
3. Analyze the effects of price floors: When a price floor is set above the equilibrium price, it usually causes a surplus because the quantity supplied exceeds the quantity demanded at that price.
4. Consider how businesses respond to shortages or surpluses: In the case of shortages, businesses might ration goods, reduce production, or find alternative markets. In the case of surpluses, businesses might lower production, offer discounts, or store excess inventory.
5. Conclude that price regulations impact business practices by disrupting the natural balance of supply and demand, leading businesses to adjust their strategies accordingly rather than simply maximizing profits or ignoring regulations.