Which of the following best describes a reduction in price to attract customers in a market with a binding price ceiling?

• A. It may occur in black markets, where sellers offer goods below the legal price ceiling to attract buyers.
• B. It always leads to an increase in the quantity supplied.
• C. It is not possible, since prices cannot legally rise above the ceiling.
• D. It is illegal if the new price falls below the price ceiling.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what a binding price ceiling means. A binding price ceiling is a legal maximum price set below the market equilibrium price, which prevents sellers from charging more than this ceiling.
2. Step 2: Recognize that with a binding price ceiling, the market price cannot legally rise above the ceiling, but it can be at or below the ceiling. This means sellers can offer prices lower than the ceiling to attract buyers.
3. Step 3: Consider the concept of black markets. When the legal market is restricted by a price ceiling, black markets may emerge where goods are sold outside legal regulations, sometimes at prices different from the ceiling.
4. Step 4: Analyze the options: a reduction in price below the ceiling to attract customers can happen in black markets, but it does not always lead to an increase in quantity supplied because suppliers may be unwilling or unable to supply more at lower prices.
5. Step 5: Conclude that the best description is that price reductions to attract customers under a binding price ceiling may occur in black markets where sellers offer goods below the legal price ceiling.