Question

The lower limit (floor) for inventory valuation is defined as the selling price less:

a) Cost of goods sold
b) Purchase price
c) Market value
d) Overhead expenses

Answer 1

A price floor has the greatest impact when set substantially above the equilibrium price, leading to a market surplus with fewer transactions and a negative net effect on the economy.

Step-by-step explanation:

A price floor will have the largest effect on a market when it is set substantially above the equilibrium price. This is because a price floor set at this level is much higher than what the forces of supply and demand have determined to be the fair market price. As a result, the quantity demanded (Qd) becomes less than the quantity supplied (Qs), leading to a surplus.

When a price floor is enforced, and it is above the equilibrium, it limits the number of transactions to the quantity demanded as sellers are unable to sell more than consumers are willing to buy at the higher price.

Unfortunately, while some producers may benefit from the higher price, consumers face losses due to increased costs and reduced availability of goods. This imbalance means the net effect on the economy is negative, decreasing the overall social surplus.