Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It leads to a surplus of goods
B
It leads to a shortage of goods
C
It has no effect on market equilibrium
D
It eliminates competition
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 it cannot be sold for less than this price. When a price floor is established above the market equilibrium price, it can lead to a surplus, where the quantity supplied exceeds the quantity demanded. For example, if the government sets a price floor for milk at $3 per gallon, but the equilibrium price is $2, farmers might produce more milk because they want to sell at the higher price, but consumers may not buy as much at that price. This creates extra milk that doesn’t get sold, leading to waste or unsold inventory. Overall, a price floor can disrupt the natural balance of supply and demand in the market.
Detailed Explanation
A price floor sets a minimum price for a good. Other options are incorrect because Some might think a price floor causes a shortage; It's a common mistake to think a price floor has no effect.
Key Concepts
market equilibrium
Topic
Understanding Price Floors
Difficulty
easy level question
Cognitive Level
understand
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