Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It creates a surplus by setting prices above equilibrium.
B
It has no effect on market equilibrium.
C
It guarantees that all goods are sold at the floor price.
D
It leads to increased demand for the product.
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive market, a price floor is a minimum price set by the government above the equilibrium price. This means that sellers cannot sell their goods for less than this price. When a price floor is imposed, it can lead to a surplus, where the quantity supplied exceeds the quantity demanded because consumers are not willing to buy as much at the higher price. For example, if the equilibrium price of apples is $1 per pound, but the government sets a price floor at $1. 50, farmers may produce more apples, but fewer consumers will buy them, leading to unsold apples.
Detailed Explanation
A price floor sets a minimum price above the market equilibrium. Other options are incorrect because Some might think a price floor has no impact; This option suggests all goods must be sold at the floor price.
Key Concepts
Market equilibrium
Price floor impact
Surplus and shortage
Topic
Long Response Questions in AP Economics
Difficulty
easy level question
Cognitive Level
understand
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