Question

A price ceiling will have the largest effect: a. substantially below the equilibrium price b. slightly below the equilibrium price c. substantially above the equilibrium price d. slightly above the equilibrium price

Short answer

A price ceiling will have the largest effect when it is substantially below the equilibrium price (Option A). This situation leads to a significant shortage in supply, as suppliers are less willing to produce the good or service at a lower price. The sizable gap between the quantity demanded and the quantity supplied results in the largest impact on the market.

Step-by-step solution

Identify the effects of price ceilings on the market

A price ceiling below the equilibrium price will lead to a shortage in supply, as suppliers will not be as willing to produce the good or service at the lower price. On the other hand, a price ceiling above the equilibrium price will not have a significant effect, as the market price would naturally remain below this ceiling.

Analyze Option A: Substantially below the equilibrium price

If the price ceiling is substantially below the equilibrium price, suppliers will produce much less of the good or service, leading to a significant shortage. This would create a large gap between the quantity demanded and the quantity supplied, causing the largest effect on the market.

Analyze Option B: Slightly below the equilibrium price

If the price ceiling is only slightly below the equilibrium price, the gap between the quantity demanded and the quantity supplied will be smaller than in option A. The effect on the market will still be noticeable, but not as large as when the price ceiling is substantially below the equilibrium price.

Analyze Option C: Substantially above the equilibrium price

If the price ceiling is substantially above the equilibrium price, it will not have a significant effect on the market because the market price will naturally stay below the price ceiling. Suppliers will not be affected by the ceiling, so the quantity supplied will match the quantity demanded, maintaining market equilibrium.

Analyze Option D: Slightly above the equilibrium price

If the price ceiling is slightly above the equilibrium price, it will also not have a substantial effect on the market, as the market price will still stay below the price ceiling. Suppliers will be minimally affected, allowing the market to operate with little disturbance.

Compare the effects of each option

Comparing all four options, it is clear that a price ceiling substantially below the equilibrium price (Option A) will have the largest effect, causing a significant shortage in the market and potentially leading to other negative consequences such as waiting lines, an underground economy, and reduced quality of goods or services. Answer: a. substantially below the equilibrium price