Question

For a price floor to prevent market forces from finding the equilibrium price, it must be set: a) Above the equilibrium price. b) Below the equilibrium price. c) At the equilibrium price. d) Regardless of the equilibrium price.

Answer 1

A price floor must be set above the equilibrium price to have an effect on the market, and the largest effect happens when it is set substantially above this price, causing a significant surplus. A price ceiling has the most substantial effect when it is substantially below the equilibrium price, resulting in excess demand and a shortage.

Step-by-step explanation:

For a price floor to prevent market forces from reaching equilibrium, it must be set above the equilibrium price; if set below, it would not be binding and the market could still potentially reach the equilibrium price. The impact of a price floor depends on where it is set in relation to this equilibrium.

Identifying the most accurate statement

A price floor will have the largest effect if it is set:

• Substantially above the equilibrium price - This creates a significant surplus, as suppliers want to sell at the high price but consumers do not want to buy as much at that price.
• Slightly above the equilibrium price - This also creates a surplus, but less so than if the price floor was set substantially above the equilibrium.
• Slightly below the equilibrium price - This has no effect because the market price is already higher than the floor.
• Substantially below the equilibrium price - Same as slightly below, it has no effect.

When using a demand and supply diagram to illustrate this, the price floor is a horizontal line. The further above equilibrium this line is set, the more significant the market impact.

Conversely, a price ceiling will have the largest effect if set substantially below the equilibrium price because it will create excess demand; more people want to buy at the lower price but fewer suppliers are willing to sell, resulting in a shortage.

Answer 2

A price floor prevents market forces from reaching the equilibrium price when it is set above the equilibrium price (option a). It is most effective and has a significant impact when substantially above the equilibrium price, creating a surplus in the market.

Step-by-step explanation:

For a price floor to prevent market forces from finding the equilibrium price, it must be set above the equilibrium price. A price floor represents a minimum price set by the government below which the goods or services cannot be sold in the market. If the price floor is set above the equilibrium price, it becomes effective because it restricts sellers from trading at the market equilibrium where supply equals demand, causing a surplus as the quantity supplied exceeds the quantity demanded at the higher price.

When discussing the impact of a price floor in relation to an equilibrium price, consider the following:

• If set substantially above the equilibrium price, it will lead to a significant surplus, as producers are willing to sell much more than consumers are willing to buy at that price.
• If set slightly above the equilibrium price, the surplus is smaller, but the price floor is still effective.
• Setting the price floor slightly below the equilibrium price will not affect the market, as the market can still reach equilibrium.
• Setting it substantially below the equilibrium price is also ineffective as it has no impact on market transactions happening above that floor.

Hence, the answer is option a.