CFA Practice Question

CFA Practice Question

When the price of a good is legally fixed below the equilibrium level, a shortage often results. This shortage ______
A. is the result of a shift in supply.
B. is the result of a shift in demand.
C. occurs because the price ceiling prevents the market mechanism from establishing an equilibrium price.
Explanation: If price is not allowed to rise to the equilibrium price, then the market will not clear. Excess demand for the good will exist because at the lower than equilibrium price consumers wish to buy more goods than producers are willing to supply. This results in shortages.

User Contributed Comments 7

User Comment
ahan A shift in demand (shift to right, increase) is the cause for this shortage because the pirce is below euqilibrium price.
Spain81 Ahan you're wrong. There is no shift in demand. Changes in price cause movements along the curve not shifts.
MFApassed If the Price Ceiling is above the Equilibrium Price (Market Price) than a shortage is created, the quantity demanded will exceed the quantity supplied.
Yohan3109 and there is no shift for supply?
meghanchloe MFApassed,

You meant the price ceiling is below the equilibrium price, correct? There would be no affect if the price ceiling is above the equilibrium price.
mattg Changes in PRICE cause movement ALONG supply/demand curves, NEVER A SHIFT of the curves, if you remember this you can rule out erroneous answers
Mikehuynh Price control:

- set above the equilibrium => floor
- set below the equilibrium => ceiling

So the floor is above while the ceiling is below
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