Question

In a period of rising​ prices, the FIFO method will result in the highest net income for the period.

a) True
b) False

Answer 1

A price floor has the largest effect when set substantially above the equilibrium price, resulting in surpluses. A price ceiling has the greatest impact when set substantially below the equilibrium price, causing shortages. Both can be illustrated on a demand and supply diagram.

Step-by-step explanation:

The most accurate statement about the effect of a price floor is that it will have the largest effect if it is set substantially above the equilibrium price. When a price floor is significantly higher than the equilibrium price, the quantity supplied will be much greater than the quantity demanded, leading to excess supply or surpluses. On the other hand, a price floor set slightly above, at, or below the equilibrium price will have no effect or only a minimal effect on the market.

For a price ceiling, it will have the largest effect if it is set substantially below the equilibrium price. In this scenario, the quantity demanded will exceed the quantity supplied, leading to shortages in the market.

A demand and supply diagram is useful for illustrating these effects, with the price floor represented as a horizontal line above the equilibrium point for price floors and below it for price ceilings.