Question

If a maximum price is set below the equilibrium price, [1] there will be a shortage. [2] sellers will find it difficult to find willing buyers. [3] market equilibrium will occur despite government regulation. [4] all buyers will be able to purchase their desired quantities.

Answer 1

Answer:

The correct option is [1] there will be a shortage

If a maximum price is set below the equilibrium price, there will a shortage.

Reason: In the below diagram,

X- axis represents Quantity

Y-axis represents Price

P_e represents the equilibrium price

Q_e represents the equilibrium quantity

Now, if a maximum price is set below, for example, at price P_max, the quantity demanded increases, and the quantity supplied decreases. Thus, at P_max, the quantity demanded is Q₂ and the quantity supplied is Q_1. Clearly, Q₂ > Q_1. This means that there is excess demand in the economy but the supply is not enough to meet the excess demand. Thus, there will be a shortage.

Option 2: sellers will find it difficult to find willing buyers

This is an incorrect statement. As shown in the below diagram, at a maximum price below the equilibrium price, the quantity demanded is more than the quantity supplied, that is, buyers are already there in the market and sellers will not find it difficult to find willing buyers.

Option 3: market equilibrium will occur despite government regulation

This is an incorrect statement. As shown in the below diagram, at a maximum price set by the government below the equilibrium price, the quantity demanded is more than the quantity supplied, this leads to market disequilibrium.

Option 4: all buyers will be able to purchase their desired quantities

This is an incorrect statement. As shown in the below diagram, at a maximum price below the equilibrium price, the quantity demanded is more than the quantity supplied. All buyers will not be able to purchase their desired quantities. This provides the opportunity to establish a "black market". As some buyers buy at a low maximum price and sell it to other buyers who initially couldn't get it and would be willing to pay a high price.