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    Effect of a Price Ceiling

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    The imposition of a price ceiling below the equilibrium price is most likely to cause a:
    A) change in the supply curve
    B) increase in the quantity supplied
    C) welfare loss to the economy
    D) decrease in the quantity demanded

    Please explain which option is correct, why it is correct, and why the others are incorrect.
    How does this imposition effect supply and demand?

    Thank you.

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    Solution Preview

    Please see the attached file for a graphic illustration of a price ceiling.
    (C) is correct.
    A price ceiling is effective when it is below the equilibrium price. It is likely to decrease the quantity supplied and increase the quantity demanded, resulting in a shortage. Thus, there will be a deadweight loss (or loss in the total ...

    Solution Summary

    This 215 word solution analyzes the effect of a price ceiling on demand and supply, discusses why one option is correct, and explains why the other options are mistaken. In addition, it also provides a graphic illustration of a price ceiling with a detailed explanation of how the answer is achieved.