Question

When the government enforces a price ceiling on a good, which is lower than the current market price, _________.

• A. a perfectly competitive firm produces more
• B. a perfectly competitive firm produces less
• C. a monopoly firm produces more
• D. a monopoly firm produces less

Answer 1

Answer: (B), (C)

The correct options are
B

a perfectly competitive firm produces less

C

a monopoly firm produces more

When the government enforces a price ceiling which is below the market price, a perfectly competitive firm produces less because the profit maximization quantity is lesser at that price level. For a monopoly firm, at the reduced price, the profit-maximizing quantity is actually greater than it was at a higher price. Hence production increases.