Question

A price floor is binding when it is set:______

a. above the equilibrium price, causing a shortage.
b. below the equilibrium price, causing a surplus.
c. above the equilibrium price, causing a surplus.
d. below the equilibrium price, causing a shortage.

Answer 1

a. above the equilibrium price, causing a shortage.

Step-by-step explanation:

A price floor is binding when it is set above the equilibrium price, causing a shortage.

A price floor is the lowest legal price that can be paid in a market for goods and services, labor, or financial capital. When a price floor is set, government purchase the excess product in the market so as to maintain the new price thus resulting in a shortage of the product.

Answer 2

C. Above the equilibrium price, causing a surplus.

Step-by-step explanation:

They can be said to be the government polices imposed that been used in the system of buying and selling to manipulate the market. A binding price ceiling is when the price ceiling that is set by the government is below the prevailing equilibrium price. For example, if the equilibrium price for rent was $100 per month and the government set the price ceiling of $80, then this would be called a binding price ceiling because it would force landlords to lower their price from $100 to $80.