The impact of a binding price floor in the economy.
Answer to Problem 1CQQ
Option ‘d’ is correct.
Explanation of Solution
The
Option (d):
When there is a price floor in the economy, then the producers will get a minimum of the floor price and this will increase the revenue of the producers. This minimum guaranteed price would lead to the increased supply by the producers; more than the economic demand in the economy. Thus, the price floor leads to the economic surplus in the economy. So, option ‘d’ is correct.
Option (a):
When there is a price floor in the economy, then the producers will get a minimum of the floor price and this will increase the revenue of the producers. This minimum guaranteed price would lead to the increased supply by the producers; more than the economic demand in the economy. This causes the movement up along the existing supply curve and there will be no shift in the supply curve. Thus, option ‘a’ is incorrect.
Option (b):
When there is a price floor in the economy, then the producers will get a minimum of the floor price and this will increase the revenue of the producers. This minimum guaranteed price would lead to the increased supply by the producers; more than the economic demand in the economy. Since the price is set by the government, the demand will remain the same and usually, the floor price will be set above the
Option (c):
When there is a price floor in the economy, then the producers will get a minimum of the floor price and this will increase the revenue of the producers. This minimum guaranteed price would lead to the increased supply by the producers; more than the economic demand in the economy. This increased supply causes the economic surplus in the economy and not economic shortage. Thus, option ‘c’ is incorrect.
Concept introduction:
Price floor: It is the minimum legal price set for a commodity or service by the government or the authority. This is to prevent the prices from going too low.
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