Chapter 4: Problem 12

Select the correct answer. A price ceiling will usually shift: a. demand b. supply c. both d. neither

Short Answer

Expert verified

The correct answer is: \(d. \ neither\) A price ceiling does not directly shift demand or supply but may cause movement along the existing curves due to changes in the quantity demanded and supplied at the imposed maximum price.

Step by step solution

Understanding Price Ceilings

A price ceiling is a government-imposed limit on the maximum price that can be charged for a good or service in a market. Price ceilings are implemented to protect consumers from high prices, but they can also create unintended consequences such as shortages and black markets.

The Effect of Price Ceilings on Demand

A price ceiling does not directly cause a shift in the demand curve. The demand curve shows the quantity of a good or service that consumers are willing and able to buy at different prices. A price ceiling merely establishes a maximum price, but it does not change consumers' willingness or ability to buy the good. Hence, a price ceiling does not inherently shift demand.

The Effect of Price Ceilings on Supply

When a price ceiling is imposed, it restricts the profit potential for suppliers. Since the price is kept below the market equilibrium price, suppliers may be unwilling or unable to produce the same supply as before. This can lead to a decrease in the quantity supplied, causing the market to move along the existing supply curve and possibly create a shortage. However, the price ceiling itself does not directly shift the supply curve.

Evaluating Whether Price Ceilings Shift Both Demand and Supply

As we have established in previous steps, a price ceiling does not directly shift either the demand or the supply curve. It can, however, create movement along the existing curves due to changes in the equilibrium price and quantity in the presence of the imposed ceiling.

Selecting the Correct Answer

Based on the analysis in the previous steps, we can conclude that the correct answer is: d. neither A price ceiling does not directly shift demand or supply but may cause movement along the existing curves due to changes in the quantity demanded and supplied at the imposed maximum price.