Which of the following statements is true about price ceilings?

• A. Price ceilings are designed to ensure producers receive higher profits.
• B. Price ceilings always result in a surplus of goods.
• C. A price ceiling set above the equilibrium price has a significant effect on the market.
• D. A price ceiling set below the equilibrium price typically leads to a shortage.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand what a price ceiling is. A price ceiling is a government-imposed limit on how high a price can be charged for a product. It is usually set below the equilibrium price to make goods more affordable for consumers.
2. Step 2: Analyze the effect of a price ceiling set above the equilibrium price. Since the ceiling is higher than the market equilibrium, it does not restrict the price, so the market price remains at equilibrium and there is no significant effect.
3. Step 3: Consider the effect of a price ceiling set below the equilibrium price. This creates a maximum price lower than what the market would naturally set, leading to higher quantity demanded but lower quantity supplied, causing a shortage.
4. Step 4: Evaluate the statements about price ceilings: (a) Price ceilings are not designed to increase producer profits; they usually reduce profits by limiting prices. (b) Price ceilings do not cause surpluses; instead, they often cause shortages. (c) A price ceiling above equilibrium has no significant effect. (d) A price ceiling below equilibrium typically causes a shortage.
5. Step 5: Conclude that the true statement is that a price ceiling set below the equilibrium price typically leads to a shortage, as it restricts prices and disrupts the natural balance of supply and demand.