Principles of Macroeconomics, Loose-Leaf Version
Principles of Macroeconomics, Loose-Leaf Version
8th Edition
ISBN: 9781337096881
Author: Mankiw, N. Gregory
Publisher: South-Western College Pub
Question
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Chapter 6, Problem 1CQQ
To determine

The impact of a binding price floor in the economy.

Expert Solution & Answer
Check Mark

Answer to Problem 1CQQ

Option ‘d’ is correct.

Explanation of Solution

The price floor is the minimum price that can be charged for the product in the market. This is to prevent the prices from going too low and creating a loss to the producers and service providers. The most common price floor is the minimum wages set by the government. The laborers should be paid minimum wages when their service is rendered.

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 equilibrium price. It declines the demand and usually leads to a top-leftward shift in the demand curve. Thus, option ‘b’ is incorrect.

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.

Economics Concept Introduction

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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Use the following table to work Problems 5 to 9. Minnie's Mineral Springs, a single-price monopoly, faces the market demand schedule: Price Quantity demanded (dollars per bottle) 10 8 (bottles per hour) 0 1 6 2 4 3 2 4 0 5 5. a. Calculate Minnie's total revenue schedule. b. Calculate its marginal revenue schedule. 6. a. Draw a graph of the market demand curve and Minnie's marginal revenue curve. b. Why is Minnie's marginal revenue less than the price? 7. a. At what price is Minnie's total revenue maxi- mized? b. Over what range of prices is the demand for water from Minnie's Mineral Springs elastic? 8. Why will Minnie not produce a quantity at which the market demand for water is inelastic?
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