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Quizzes > Business & Finance > Finance & Economics

Binding Price Controls: True or False Quiz

Think you know government price controls? Take the test and find out!

Difficulty: Moderate
2-5mins
Learning OutcomesCheat Sheet
Paper art quiz illustration showing price ceiling and price floor charts on dark blue background

This true-or-false quiz helps you practice binding price controls and see how ceilings and floors work in real markets. You'll judge statements on shortages and surpluses, with items like what a below‑equilibrium price ceiling does and quick true‑or‑false questions, then get instant feedback so you can spot gaps before an exam or a class discussion.

A binding price ceiling is set above the equilibrium price.
False
True
A binding price ceiling only takes effect if set below the market equilibrium, thereby restricting price from rising to its natural equilibrium level. When the ceiling is above equilibrium, the market price remains unaffected and the control is non-binding. Therefore, a binding ceiling must lie below equilibrium to have an impact.
A binding price floor is set above the equilibrium price.
True
False
A price floor only binds when it is set above the market equilibrium wage or price, causing suppliers to offer more than consumers demand. If set below equilibrium, the floor is non-binding and has no effect. Binding floors above equilibrium can lead to a surplus in the market.
A non-binding price control has no effect on the market.
False
True
Non-binding price controls lie on the non-restrictive side of the equilibrium and therefore do not alter market outcomes. For a ceiling, this means it is set above equilibrium; for a floor, below equilibrium. As a result, the market naturally operates as if the control were absent.
Binding price ceilings result in sustained surpluses.
True
False
A binding price ceiling is set below equilibrium, causing quantity demanded to exceed quantity supplied - this creates a shortage, not a surplus. Surpluses occur only when price floors are set above equilibrium. Therefore, binding ceilings lead to persistent shortages in the market.
Binding price floors result in sustained surpluses.
False
True
A binding price floor is set above equilibrium, which leads to quantity supplied exceeding quantity demanded. This gap between supply and demand results in persistent surpluses or unsold inventory. Price floors are often used in agricultural markets and labor markets as minimum wages.
A binding price ceiling always benefits consumers more than producers.
True
False
While some consumers pay lower prices under a binding ceiling, the resulting shortage means not all consumers can purchase the good. Producers face lower revenues and reduced supply, harming some consumers and producers alike. Net consumer surplus may even decline due to scarcity and non-price rationing.
Under a binding price ceiling, the quantity supplied equals quantity demanded at the controlled price.
True
False
With a binding price ceiling below equilibrium, quantity demanded exceeds quantity supplied, creating a shortage rather than market clearing. The controlled price prevents supply from rising to meet demand. Thus, supply and demand are not equal.
Black markets can emerge due to binding price controls.
False
True
When official prices are held below equilibrium or above equilibrium for floors, shortages or surpluses incentivize unauthorized trade at different prices. Black markets allow buyers and sellers to transact at illegal prices closer to equilibrium. This undermines the intended effect of the controls.
A binding minimum wage causes unemployment because the wage floor is above the equilibrium wage.
True
False
A minimum wage set above the market-clearing wage means employers demand fewer workers while more workers are willing to work. The gap between labor supply and labor demand creates unemployment. Economic theory predicts this effect under perfect competition.
Price ceilings can improve allocative efficiency.
True
False
Price ceilings introduce deadweight loss by preventing mutually beneficial trades between buyers and sellers at equilibrium. This results in underproduction relative to the socially optimal output. Consequently, they reduce allocative efficiency rather than improve it.
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Study Outcomes

  1. Define binding price control -

    Understand the binding price control definition and distinguish it from non-binding regulations in market settings.

  2. Differentiate price ceilings and price floors -

    Learn how to tell apart government-imposed ceilings and floors and recognize when each one binds supply or demand.

  3. Analyze market effects -

    Examine how binding price controls lead to shortages, surpluses, and welfare changes in real-world markets.

  4. Identify real-world examples -

    Spot practical instances of price ceilings, price floors, and other government price controls in everyday scenarios.

  5. Evaluate true/false statements -

    Apply critical thinking to determine the accuracy of statements about binding price control and related concepts.

  6. Apply economic reasoning -

    Use economic principles to predict the outcomes of various price control interventions and reinforce your understanding.

Cheat Sheet

  1. Binding Price Ceilings Cause Shortages -

    A binding price control ceiling set below the market equilibrium price leads to a persistent shortage as quantity demanded exceeds quantity supplied. For example, rent control in large cities often causes housing scarcities and black-market sublets (Mankiw, 7th ed.). Use the mnemonic "Ceiling below = Scarcity" to cement the binding price ceiling concept.

  2. Binding Price Floors Lead to Surpluses -

    A binding price floor placed above equilibrium, such as a minimum wage above the market rate, creates a surplus when supply outpaces demand. Agricultural price supports often result in excess crops that governments must buy or dispose of (USDA reports). Remember "Floor above = Flood of goods" to recall the price control surplus effect.

  3. Deadweight Loss from Price Controls -

    Any binding price control - ceiling or floor - generates deadweight loss, represented by the triangular area between supply and demand curves. The formula for deadweight loss is ½ × (price distortion) × (quantity distortion), highlighting the inefficiency (Varian, 2014). Visualizing this triangle on your graph helps you spot lost gains from trade.

  4. Unintended Consequences of Government Price Controls -

    Government price controls can trigger hidden costs, like reduced quality, long queues, or black markets, as producers circumvent ceilings or floors. A classic example is Venezuela's fuel price ceiling, which led to chronic shortages and corruption. Think "Lines, Lies, and Low Quality" to link price ceilings with real-world pitfalls.

  5. Assessing Surplus Changes under Binding Price Control -

    To evaluate a binding price control's impact, compare consumer surplus and producer surplus before and after intervention using supply-demand diagrams. Binding ceilings shift surplus from producers to consumers but still create net welfare loss; binding floors favor producers yet harm consumers. Practicing these area calculations on sample problems (Khan Academy) solidifies your mastery.

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