Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A minimum price set by the government, leading to surplus in the market.
B
A maximum price set by the market, leading to shortages.
C
A minimum price set by the government, leading to equilibrium in the market.
D
A maximum price set by the government, leading to surplus.
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, meaning sellers cannot sell it for less than this price. This is often done to protect producers, ensuring they receive a fair income. In a competitive market, if the price floor is set above the equilibrium price, where supply meets demand, it can lead to excess supply, or a surplus. For example, if the government sets a price floor on milk at $3 per gallon, but the market equilibrium price is $2, farmers will produce more milk than consumers are willing to buy at that higher price. As a result, there may be unsold milk, which can hurt farmers in the long run if they cannot sell all their products.
Detailed Explanation
A price floor is a minimum price set by the government. Other options are incorrect because This option confuses price floors with price ceilings; This option suggests that a price floor creates balance in the market.
Key Concepts
Price floor
Topic
Price Floors in Competitive Markets
Difficulty
easy level question
Cognitive Level
understand
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