Final answer:
The statement is true; LIFO results in the lowest gross profit in a period of rising prices because it assumes the most expensive inventory items are sold first. A price floor has the largest effect when set substantially above the equilibrium price, creating a surplus.
Step-by-step explanation:
In a period of rising prices, the use of the Last-In, First-Out (LIFO) method for inventory accounting often results in the lowest gross profit compared to other inventory accounting methods. This is because LIFO assumes that the most recently acquired items (usually the most expensive during inflation) are sold first. Therefore, higher costs of goods sold are reported, reducing the gross profit.
The answer to the student's question is (a) True.
A price floor will have the largest effect if it is set substantially above the equilibrium price. This is because a price floor is a minimum legal price that can be charged for a good or service. If set above the equilibrium, the price floor is effective and leads to a surplus of goods because the price is too high for consumers to purchase all the goods that producers are willing to supply at that price. If it's set below equilibrium, it doesn't have an impact, as the market price is naturally higher.