Suppose the accompanying graph represents a hypothetical market for luxury automobiles. If the government imposes a price ceiling below the equilibrium price, what is the most likely outcome in this market?

• A. The price of luxury automobiles will increase above the equilibrium price.
• B. A shortage of luxury automobiles will occur.
• C. The market will remain at equilibrium.
• D. A surplus of luxury automobiles will occur.

Answer: (B)

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 set below the equilibrium price to make the product more affordable.
2. Step 2: Identify the equilibrium price and quantity where the supply and demand curves intersect. This is the price and quantity the market would naturally settle at without intervention.
3. Step 3: Analyze the effect of setting a price ceiling below the equilibrium price. Since the price is artificially kept lower, consumers want to buy more (increase in quantity demanded), but producers want to supply less (decrease in quantity supplied).
4. Step 4: Recognize that the quantity demanded exceeds the quantity supplied at the price ceiling, creating a shortage. This means there are not enough luxury automobiles available to meet consumer demand at the imposed price.
5. Step 5: Conclude that the most likely outcome is a shortage of luxury automobiles, as the price ceiling disrupts the natural balance of supply and demand.