For a price ceiling to be a binding constraint on the market, the government must set it ________.

• A. above the equilibrium price
• B. below the equilibrium price
• C. equal to the equilibrium price
• D. at any price level

Answer: (B)

Verified step by step guidance

1. Understand what a price ceiling is: it is a legal maximum price that sellers can charge for a good or service.
2. Recall the concept of equilibrium price, which is the price where quantity demanded equals quantity supplied in a market.
3. Recognize that for a price ceiling to be binding, it must actually restrict the market price from reaching equilibrium.
4. Analyze the effect of setting the price ceiling above the equilibrium price: since the market price is already lower, the ceiling does not constrain the price.
5. Conclude that the price ceiling must be set below the equilibrium price to be binding, causing a shortage by increasing quantity demanded and decreasing quantity supplied.