Question

Suppose the equilibrium price of a jar of spaghetti sauce is $3, and the government imposes a price floor of $4 per jar. As a result of the price floor, the

A. demand curve for spaghetti sauce shifts to the left.
B. supply curve for spaghetti sauce shifts to the right.
C. quantity demanded of spaghetti sauce stays the same
D. quantity demanded of spaghetti sauce decreases, and the quantity of spaghetti sauce that firms want to supply increases.

Answer 1

When the government imposes a price floor above the equilibrium price, it leads to excess supply, a decrease in the quantity demanded, and an increase in the quantity supplied, hence option D is correct.

Step-by-step explanation:

If the equilibrium price of a jar of spaghetti sauce is $3 and the government imposes a price floor of $4 per jar, this introduces a situation where the price is set above the equilibrium price, which is the price where demand and supply meet. Price floors are designed to prevent a price from falling below a certain level, but when set above the equilibrium price, they lead to excess supply or surpluses because the quantity supplied will exceed the quantity demanded. As a result, the quantity demanded of spaghetti sauce decreases, and the quantity supplied increases, which is consistent with option D.

Answer 2

Option (D) is correct.

Step-by-step explanation:

When there is a imposition of price floor by the government, if this price floor exceeds the prevailing market equilibrium price then as a result there is a reduction in the quantity demanded and increase in the quantity supplied.

In our case, price floor of $4 > equilibrium price of a jar of spaghetti sauce, $3

Hence, it will become expensive for the consumers to buy the same quantity at a higher prices, as a result there is a fall in the quantity demanded and at the same time there is a rise in the quantity supplied as it will become more profitable for the firm to produce more and supply more.