Which of the following statements correctly explains price floors and price ceilings?

• A. Price ceilings often lead to shortages because the legal price is below the equilibrium price.
• B. A price floor sets a legal minimum price that buyers must pay for a good or service.
• C. A price ceiling sets a legal maximum price that sellers can charge for a good or service.
• D. Price floors often lead to surpluses because the legal price is above the equilibrium price.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of price ceilings. A price ceiling is a legal maximum price that sellers are allowed to charge for a good or service. It is set below the equilibrium price to make the good more affordable, which can lead to shortages because the quantity demanded exceeds the quantity supplied at that price.
2. Step 2: Understand the concept of price floors. A price floor is a legal minimum price that buyers must pay for a good or service. It is set above the equilibrium price to ensure producers receive a minimum income, which can lead to surpluses because the quantity supplied exceeds the quantity demanded at that price.
3. Step 3: Analyze the effects of price ceilings. Since the price ceiling is below the equilibrium price, the lower price increases demand but decreases supply, causing a shortage where demand is greater than supply.
4. Step 4: Analyze the effects of price floors. Since the price floor is above the equilibrium price, the higher price decreases demand but increases supply, causing a surplus where supply is greater than demand.
5. Step 5: Summarize the correct statements: Price ceilings set a legal maximum price and often cause shortages; price floors set a legal minimum price and often cause surpluses.