A price ceiling is a legislated price that is:

• A. set at the equilibrium price, allowing the market to clear
• B. set above the equilibrium price, making it illegal to charge a lower price
• C. set below the equilibrium price, making it illegal to charge a higher price
• D. set by the government to maximize producer surplus

Answer: (C)

Verified step by step guidance

1. Understand the concept of a price ceiling: it is a legal maximum price that sellers can charge for a good or service.
2. Recall that the equilibrium price is where the quantity demanded equals the quantity supplied in a free market without intervention.
3. Recognize that if a price ceiling is set above the equilibrium price, it is non-binding and does not affect the market because the market price is already lower.
4. Note that if a price ceiling is set at the equilibrium price, the market clears normally, so it has no effect.
5. Identify that a binding price ceiling must be set below the equilibrium price, which prevents prices from rising to the equilibrium level and makes it illegal to charge a higher price.