Question

When the government intervenes in the functioning of the market by fixing a ‘price ceiling’ of an essential commodity to protect the interest of the consumers, at what level the price ceiling must be fixed to be meaningful:

Options

• equal to the equilibrium price

• higher than equilibrium price

• lower than equilibrium price

• it does not matter at what level

Answer 1

lower than equilibrium price

Explanation:

A price ceiling is effective only when it is set below the equilibrium price, making the good more affordable for consumers. This leads to excess demand (shortage), as quantity demanded exceeds quantity supplied at the imposed lower price.