Question

an effective price floor results in: a. output being reduced to zero. b. output increases to infinity. c. market price being below the equilibrium price. d. market prices being above the equilibrium price.

Answer 1

A price floor will have the largest effect if it is set substantially above the equilibrium price, leading to excess supply and potential surplus in the market.

Step-by-step explanation:

A price floor will have the largest effect if it is set substantially above the equilibrium price. A price floor prevents a price from falling below a certain level, but has no effect on prices above that level. When a price floor is set substantially above the equilibrium price, it creates excess supply and can lead to a surplus of goods in the market. This is illustrated in the demand and supply diagram by the entire area inside the dotted lines from the demand curve to the supply curve.

Examples of price floors include minimum wage laws, where the government sets a minimum wage that employers are required to pay their workers. When the minimum wage is set much higher than the equilibrium wage rate, it can result in high unemployment rates as businesses cannot afford to hire as many workers at the higher wage.

Answer 2

A price floor is set above the equilibrium price and results in excess supply when set substantially higher. This can lead to a surplus of goods or services in the market. The surplus is illustrated on a demand and supply diagram.

Step-by-step explanation:

A price floor is a government-imposed minimum price that must be paid for a good or service. It is set above the equilibrium price in order to protect producers and ensure they receive a fair income. When a price floor is set at a substantially high level, it will result in a decrease in demand and an increase in supply. This creates excess supply or a surplus of the goods or services.

For example, let's consider the market for agricultural products. If the government sets a price floor for wheat that is substantially above the equilibrium price, it will result in a surplus of wheat as producers are incentivized to increase production. This excess supply can lead to wastage and storage costs for unsold wheat.

On a demand and supply diagram, a price floor that is set substantially above the equilibrium price is represented by a horizontal line above the intersection of the demand and supply curves, creating a gap between the floor and the equilibrium price. The area between the floor and the equilibrium price represents the excess supply.