The imposition of a binding price ceiling on a market causes which of the following outcomes?

• A. A surplus, as the quantity supplied exceeds the quantity demanded
• B. No effect on the market outcome
• C. The market to reach equilibrium at a higher price
• D. A shortage, as the quantity demanded exceeds the quantity supplied

Answer: (D)

Verified step by step guidance

1. Understand what a binding price ceiling means: it is a legal maximum price set below the market equilibrium price, preventing the price from rising to its natural equilibrium level.
2. Recall the law of demand and supply: at a lower price, consumers want to buy more (quantity demanded increases), but producers want to supply less (quantity supplied decreases).
3. Analyze the effect of the price ceiling being below equilibrium: since the price cannot rise to clear the market, the quantity demanded will exceed the quantity supplied.
4. Recognize that this imbalance between quantity demanded and quantity supplied results in a shortage, where there are not enough goods to satisfy consumer demand at the ceiling price.
5. Conclude that the correct outcome of a binding price ceiling is a shortage, not a surplus or no effect, and the market cannot reach equilibrium at a higher price due to the imposed ceiling.