If the government sets the price of milk at $3.50 when it costs $4.00, what market condition will occur?

When the government sets the price of milk at $3.50 while the cost to produce or the market equilibrium price is $4.00, this creates a price ceiling. A price ceiling is a maximum limit on the price that can be charged for a good or service, and it is set below the equilibrium price.

In this situation, because the price is artificially lowered to $3.50, consumers will demand more milk at this lower price, as it becomes more affordable. However, producers are incentivized to supply less milk at this price since it does not cover their costs of production (which are at $4.00). This imbalance between the increased quantity demanded and the decreased quantity supplied results in a shortage.

Therefore, the correct answer highlights that the market will experience a shortage of milk, as the quantity of milk demanded exceeds the quantity supplied at the government-mandated price. The market cannot reach equilibrium under these conditions, leading to an inefficiency in the allocation of resources.