Final answer:
The largest effect of a price floor occurs when it's set substantially above the equilibrium price, leading to a large surplus. Option D is correct.
Step-by-step explanation:
Price Floor and Market Equilibrium
A price floor is a government-imposed limit on how low a price can be charged for a product. For the price floor to have an effect on the market, it must be set in relation to the market equilibrium, where the supply and demand curves intersect. The most accurate statement in terms of the impact of a price floor is:
a. substantially above the equilibrium price
When a price floor is set substantially above the equilibrium price, it will have the largest effect because it creates a significant surplus where the quantity supplied exceeds the quantity demanded.
A price floor set slightly above the equilibrium price would cause a smaller surplus, while setting it slightly below will have no effect because the market can still clear at the equilibrium. If the price floor is set substantially below the equilibrium price, it would also have no effect since the market price would naturally stay above such a floor.
Demand and Supply Diagram Illustration
To illustrate, sketching the demand and supply curves on a graph shows the equilibrium point where the two curves intersect. Setting a price floor will be represented by a horizontal line at the designated price level:
Substantially above equilibrium creates a huge surplus.
Slightly above equilibrium creates a smaller surplus.
At or slightly below equilibrium has no effect since the market price is typically at the equilibrium level.
Substantially below equilibrium also has no effect.
A price floor above but near equilibrium causes a smaller surplus, while one set at or below the equilibrium price has no effect on the market.