Answer to Question #253867 in Economics of Enterprise for challo

Question

If a binding price ceiling is lifted, what will happen to the price and quantity traded in the market.

Select one:

a. The price and the quantity traded will both decrease.

b. The price will change but the quantity traded will remain unchanged.

c. The price will increase and the quantity traded will decrease.

d. The price will decrease and the quantity traded will increase.

e. The price and the quantity traded will both increase.

Answer 1

Solution:

The correct answer is c. The price will increase and the quantity traded will decrease.

 

When a price ceiling is removed, the market returns to its natural equilibrium. Prices will rise due to high demand until the quantity supplied equals the quantity demanded. As a result of the price increase, demand for goods will fall.

Overall, removing a price ceiling returns the market to normal operation, which may result in higher or lower prices.