Which of the following best describes what can happen if a government sets a price ceiling below the equilibrium price?

• A. Producers will increase production to meet the higher demand.
• B. A surplus may occur because the quantity supplied exceeds the quantity demanded.
• C. A shortage may occur because the quantity demanded exceeds the quantity supplied.
• D. The market will always reach equilibrium regardless of the price ceiling.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of a price ceiling. A price ceiling is a government-imposed limit on how high a price can be charged for a good or service. It is usually set below the equilibrium price to make the good more affordable.
2. Step 2: Recall that the equilibrium price is where the quantity demanded equals the quantity supplied. When a price ceiling is set below this equilibrium, the price is artificially kept lower than what the market would naturally set.
3. Step 3: Analyze the effects of a price ceiling below equilibrium. At this lower price, consumers want to buy more (increase in quantity demanded), but producers are less willing to supply the good (decrease in quantity supplied) because the price may not cover their costs or provide enough profit.
4. Step 4: Recognize that this imbalance between higher quantity demanded and lower quantity supplied leads to a shortage, meaning there is not enough of the good available to satisfy all consumers at the ceiling price.
5. Step 5: Conclude that the correct description is that a shortage may occur because the quantity demanded exceeds the quantity supplied when a price ceiling is set below the equilibrium price.