Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It results in a surplus as supply exceeds demand.
B
It ensures all consumers can purchase the good at a lower price.
C
It leads to an equilibrium where quantity demanded equals quantity supplied.
D
It decreases the incentive for producers to supply the good.
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 must be paid for a good or service, and it is above the market equilibrium price. When this happens, sellers cannot sell their product for less than the price floor, which can lead to an excess supply because producers are willing to sell more at the higher price, but consumers may not buy as much. For example, if the government sets a price floor on milk at $3 per gallon, but the market price would normally be $2, farmers might produce more milk than consumers want to buy at that price. This creates a surplus, where there is too much milk available, leading to wasted resources and potential losses for producers. Overall, a binding price floor can distort the supply and demand balance, causing negative effects in the market.
Detailed Explanation
A binding price floor sets a minimum price that is above the market price. Other options are incorrect because Some might think a price floor makes goods cheaper for everyone; People may believe a price floor balances supply and demand.
Key Concepts
Price Floors
Market Surplus
Supply and Demand Equilibrium
Topic
Understanding Price Floors
Difficulty
medium level question
Cognitive Level
understand
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