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Chapter 3: Problem 29

Does a price floor attempt to make a price higher or lower?

Short Answer

Expert verified
A price floor attempts to make a price higher than what the market would naturally dictate, as it is a government-imposed minimum price set above the market equilibrium price. This ensures that suppliers cannot sell their goods or services for less, protecting them from overly low prices that may cause financial distress.

Step by step solution

01

Define Price Floor

A price floor is a government-imposed minimum price, set above the market equilibrium price, that producers cannot sell their goods or services for less. It is typically implemented to protect suppliers from overly low prices that may cause financial distress.
02

Determine the Effect on Prices

Due to the price floor being set above the market equilibrium price, suppliers cannot sell below that limit. This means that the price must be at least equal to the price floor, making it higher than it would be if left to market forces.
03

Answer the Question

In conclusion, a price floor attempts to make a price higher than what the market would naturally dictate.

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Most popular questions from this chapter

Suppose there is a soda tax to curb obesity. What should a reduction in the soda tax do to the supply of sodas and to the equilibrium price and quantity? Can you show this graphically? Hint: Assume that the soda tax is collected from the sellers.

If the price is above the equilibrium level, would you predict a surplus or a shortage? If the price is below the equilibrium level, would you predict a surplus or a shortage? Why?

What is the effect of a price ceiling on the quantity demanded of the product? What is the effect of a price ceiling on the quantity supplied? Why exactly does a price ceiling cause a shortage?

Consider the demand for hamburgers. If the price of a substitute good (for example, hot dogs) increases and the price of a complement good (for example, hamburger buns) increases, can you tell for sure what will happen to the demand for hamburgers? Why or why not? Illustrate your answer with a graph.

Use the four-step process to analyze the impact of a reduction in tariffs on imports of iPods on the equilibrium price and quantity of Sony Walkman-type products.
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