Question

Supppose that the federal government places a binding price floor on coffee. To help support the price floor, the government purchases all coffeee that consumers do not buy. If the price floor remains in place for a number of years, what do you expect to happen to each of the following?

a. It will decrease.
b. It will increase.
c. It will remain the same.

Answer 1

A). It will decrease - 'the quantity of coffee demanded.'

B). It will increase - 'the quantity of coffee supplied by producers'

Step-by-step explanation:

'Binding price floor' is demonstrated as the price greater than the equilibrium price set by the government to ensure that the prices of such products do not fall below a specific limit.

As per this definition, the quantity of coffee demanded by the consumers will decrease while the quantity supplied(by producers) will increase if the binding price remains constant for several years. This situation of decrease in the quantity demanded(due to hike in prices which is artificially made by the government) while an increase in quantity supplied(due to people reducing purchases as a consequence of hike in prices) which helps ensure a surplus in that good i.e. 'coffee' here.