Question

Which statement(s) is TRUE? Price floors set above the equilibrium price cause:

I. shortages.
II. surpluses.
III. deadweight losses.

Answer 1

Price floors set above the equilibrium price lead to (I) surpluses and (II) deadweight losses; they do not cause shortages. Surpluses occur due to an excess of supply over demand at the artificial price point, while deadweight losses occur from the inefficiency in the market.

Step-by-step explanation:

The statements regarding price floors set above the equilibrium price lead to certain economic effects. Statement II is TRUE as price floors set above the equilibrium price cause surpluses. This happens because at the imposed price floor, the quantity supplied by producers exceeds the quantity demanded by consumers. On the other hand, statement I is FALSE, as shortages are a result of price ceilings set below the equilibrium price, not price floors. Lastly, statement III is TRUE because price floors set above the equilibrium lead to deadweight losses, which is a loss of economic efficiency when the optimal quantity of goods is not being produced or exchanged in the market.

In summary for the student's question:

1. Shortages are not caused by price floors set above equilibrium but by price ceilings set below it.
2. Surpluses occur when a price floor is set above the equilibrium price because the higher price discourages buyers, leading to unsold goods.
3. Deadweight losses are indeed a consequence of setting a price floor above the equilibrium price as it leads to an inefficient allocation of resources.