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Chapter 4: Q.10 (page 104)

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.

Sketch all four of these possibilities on a demand and supply diagram to illustrate your answer

Short Answer

Expert verified

a. substantially below the equilibrium price.

Step by step solution

01

Definition

Financial Markets:

The markets in a country that oversee the trading of derivatives and bonds at various times are referred to as financial markets. These markets are critical because they connect investors and businesses, providing the financial backing that businesses require to operate effectively in the market. In general, financial markets serve as a conduit between lenders and borrowers in the economy.

02

Explanation

A price ceiling keeps prices from rising over a specific point, but it has no effect on prices below that point. If it is significantly below the equilibrium price, it will have the greatest impact on producing excess demand. These scenarios are depicted in the diagram below.

03

Conclusion

Therefore, the price ceiling will have no effect on producing surplus demand if it is set substantially or slightly above the equilibrium price. These scenarios are depicted in the diagram above. So the correct option isa. substantially below the equilibrium price.

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