If a Price Ceiling Is Set Above the Current Market

question 141

Multiple Choice

If a price ceiling is set above the current market clearing price, then

• A) a surplus must immediately occur.
• B) a shortage must immediately occur.
• C) there will be incentives for black markets to develop.
• D) quantity demanded will remain equal to quantity supplied at the current market clearing price.

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Definitions:

Capital Structure

Capital structure refers to the mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity, which is considered when financing its overall operations and growth.

Bankruptcy Risk

Bankruptcy risk refers to the likelihood that a company will be unable to meet its debt obligations and may be forced into bankruptcy.

Agency Costs

Expenses arising from the conflict of interest between a company's management or its shareholders and its creditors.

Financial Risk

The risk added by the use of debt financing. Debt financing increases the variability of earnings before taxes (but after interest); thus, along with business risk, it contributes to the uncertainty of net income and earnings per share. Business risk plus financial risk equals total corporate risk.