Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It causes a surplus, reducing total welfare by preventing transactions that would occur at equilibrium.
B
It allows for more transactions to occur, increasing total welfare.
C
It eliminates consumer surplus entirely, leading to greater market efficiency.
D
It ensures all producers can sell their goods at their desired price, maximizing output.
Understanding the Answer
Let's break down why this is correct
Answer
A price floor is a minimum price set by the government for a good or service, which means that the price cannot go below this level. When a price floor is set above the equilibrium price, it can lead to a surplus of the product because suppliers want to sell more at the higher price, but consumers are not willing to buy as much. This imbalance creates deadweight loss, which is the loss of economic efficiency that occurs when the quantity of a good traded is less than what would happen in a free market. For example, if the government sets a price floor for bread at $3, but the natural market price is $2, more bread is produced than people want to buy, leading to unsold bread and wasted resources. This situation means that both consumers and producers are worse off, as opportunities for mutually beneficial trades are lost.
Detailed Explanation
A price floor sets a minimum price. Other options are incorrect because This answer suggests that a price floor helps more trades happen; This option claims that a price floor removes all consumer surplus, which is not true.
Key Concepts
Deadweight Loss
Price Controls
Market Efficiency
Topic
Calculating Deadweight Loss
Difficulty
easy level question
Cognitive Level
understand
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