Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It reduces the quantity supplied and increases demand.
B
It creates a surplus as supply exceeds demand.
C
It leads to a decrease in market prices.
D
It ensures all consumers can purchase the good at a lower price.
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 above the market equilibrium price. This means sellers cannot sell their goods for less than this price, which can lead to a surplus of goods. For example, if the government sets a price floor on milk that is higher than what consumers are willing to pay, farmers may produce more milk than people want to buy. As a result, there will be excess milk in the market, and some farmers might struggle to sell their products. Overall, a binding price floor can help certain producers but can also create waste and higher prices for consumers.
Detailed Explanation
A binding price floor sets a minimum price for a good. Other options are incorrect because Some might think a price floor lowers supply and raises demand; It's a common mistake to think a price floor lowers prices.
Key Concepts
Price Floors
Supply and Demand Dynamics
Market Surplus
Topic
Understanding Price Floors
Difficulty
medium level question
Cognitive Level
understand
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