Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A surplus of goods as supply exceeds demand
B
A shortage of goods as demand exceeds supply
C
Increased consumer spending due to lower prices
D
No effect on the market as it remains in equilibrium
Understanding the Answer
Let's break down why this is correct
Answer
A binding price floor is a minimum price set by the government that is higher than the equilibrium price, where supply and demand meet. When this happens, the price of a good or service is forced to stay above what buyers are willing to pay, leading to a surplus. For example, if the equilibrium price for apples is $1 per pound, but the government sets a price floor at $1. 50, farmers will produce more apples because they can sell them for more, but consumers may buy fewer apples at the higher price. This creates a situation where there are unsold apples, resulting in wasted resources and potential losses for farmers.
Detailed Explanation
When a price floor is set above the equilibrium price, it means sellers can't sell below that price. Other options are incorrect because Some might think a price floor causes a shortage; It's a common mistake to think lower prices come from price floors.
Key Concepts
Price Floors
Market Equilibrium
Government Intervention
Topic
Price Floors in Competitive Markets
Difficulty
medium level question
Cognitive Level
understand
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