Paper 2 · June 2009 · Market Structures
A maximum price (price ceiling) set by the government in a market is only effective in altering the market outcome if it is set...
Abelow the equilibrium price, creating excess demand.
Babove the equilibrium price, creating excess supply.
Cequal to the equilibrium price, leaving the market unchanged.
Dequal to the average cost of production for firms in the market.
Explanation
A price ceiling only binds (has an effect on the market) when it is set below the free-market equilibrium price, forcing price down and creating excess demand (a shortage). If it is set at or above the equilibrium price, the market simply clears at or below the ceiling on its own and the control has no practical effect.
Derived from ZIMSEC Economics Paper 2, June 2009, Section B Q1