In a market with a binding price ceiling, an increase in the ceiling will ________ the quantity supplied, ________ the quantity demanded, and reduce the ________.

Question

BlackTom AI · Accepted Answer

To analyze this question, we start by recalling what a binding price ceiling implies: it is set below the market-clearing price, creating a shortage because quantity demanded exceeds quantity supplied at that ceiling.
Option 1: 'increase, decrease, surplus' would suggest that raising the ceiling increases quantity supplied (true in general when price rises), and decreases quantity demanded (also true when price rises), but it ends with 'surplus,' which contradicts the typical outcome under a binding ceiling where shortages are the norm, not surpluses, after a ceiling is in place.
Option 2: 'decrease, increase, surplus' flips the direction of both the supply and demand responses. A higher ceiling generally makes it easier for sellers to supply (increase) and harder for buyers to demand (decrease), so this option misstates the basic directional changes and also ends with 'surplus,' which is inconsistent with a binding price ceiling.
Option 3: 'increase, decrease, shortage' correctly captures the classic effects: raising the price ceiling reduces the gap between the ceiling and the equilibrium price, which tends to increase quantity supplied (more incentive for producers to produce at a higher allowed price) and decrease quantity demanded (higher price discourages some buyers). Since the ceiling remains binding, the market still experiences a shortage, though smaller than before; therefore, the shortage is reduced, not eliminated entirely.
Option 4: 'decrease, increase, shortage' implies that increasing the ceiling would reduce supply and increase demand, which conflicts with the basic law of supply and demand: higher price ceilings encourage more production and reduce quantity demanded, not the opposite. The wording would also imply the shortage becomes smaller in a way that contradicts the stated directions for supply and demand, making it inconsistent.
In summary, only the third option presents the plausible directional changes in quantity supplied, quantity demanded, and shortage when a binding ceiling is raised.

ECON 100 001/002/003/004 Markets and Government Policy

In a market with a binding price ceiling, an increase in the ceiling will the quantity supplied, the quantity demanded, and reduce the .

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