Question

What effect does a government-imposed price floor have on efficiency?

1) Increases efficiency
2) Decreases efficiency
3) No effect on efficiency
4) Cannot be determined

Answer 1

A government-imposed price floor creates inefficiency in a market by causing a surplus of supply and reducing the quantity demanded.

Step-by-step explanation:

A government-imposed price floor creates inefficiency in a market. It sets a minimum price above the equilibrium price, causing a surplus of supply and reducing the quantity demanded. This reduces efficiency because it leads to resources being allocated inefficiently and can result in deadweight loss.