Chapter 8, Problem 4MCQ

To determine

The question requires us to determine the result of the price floor.

Explanation of Solution

Initially, the economy runs at point E in the given figure where,

  $\text{Equilibrium price = \$4}$

  $\text{Equilibrium quantity = 150 units}$

When the government sets a price floor at $5, the price of a product increase from $4 to $5, and at this higher price,

  $\text{Quantity demanded = 100 units}$

  $\text{Quantity supplied = 200 units}$

Since the quantity supplied exceeds the quantity demanded, there is a surplus of product in the market.

  $\begin{array}{c}\text{Size of surplus = }200–100\\ \text{= 100 units}\text{.}\end{array}$

Therefore, a price floor at $4 generates a surplus of 100 units in the market.

Option “b” is correct.

Economics Concept Introduction

A price floor is an approach to regulating market price levels. The government always sets a price floor above the equilibrium price so, consumers are willing to buy fewer goods at a price floor because they are getting them at a higher price, while producers are willing to supply more because they are receiving a higher price for their goods, so a price floor leads to a persistent surplus of goods in the market. As a result, there is a surplus (an excess of the unsold product) in the market because the quantity supplied is greater than the quantity demanded.