Final answer:
A binding price floor increases the quantity supplied, decreases the quantity demanded, and creates a surplus since it is set above the market-clearing equilibrium price. Option (a) is correct: A price floor will have the largest effect if it is set substantially above the equilibrium price.
Step-by-step explanation:
Imposing a binding price floor on a market has direct consequences on the supply and demand dynamics. Among the options provided, observations consistent with the imposition of a binding price floor would include (a) An increase in the quantity of the good supplied, as sellers are willing to provide more of the good at the higher price, and (b) A decrease in the quantity of the good demanded, since buyers are less willing to purchase the good at the increased price. As a result, the equilibrium price of the good does not increase because the imposed price is already above the equilibrium; it's the market price that is affected.
However, there is a key outcome not listed in the options which is that there would be excess supply or a surplus of the good in the market because the quantity supplied exceeds the quantity demanded at the imposed price floor.
When sketching the scenarios on a demand and supply diagram, it becomes evident that a price floor set substantially above the equilibrium price has the largest effect by creating the greatest surplus. A price floor set slightly above the equilibrium price leads to a smaller surplus. If the price floor is set below the equilibrium price, it is not binding and has no effect on the market. Therefore, the most accurate statement is option (a), as it has the largest effect by causing the greatest discrepancy between the quantity demanded and the quantity supplied.