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Chapter 3: Q.29 (page 78)

Does a price floor attempt to make a price higher

or lower?

Short Answer

Expert verified

A price floor is an attempt to raise a cost.

Step by step solution

01

Concept of price floor.

Price floor is a pricing policy in which the government establishes a minimum price below which no buyer can purchase the product and no seller can sell it in the market.

02

Explanation of price floor with diagram.

A price floor that is set higher than the equilibrium price level attempts to raise the price level. The equilibrium price and quantity are denoted by the letters Pand Qin the graphic below.

If the price floor is set higher than the equilibrium price level, it becomes legally enforceable. There would be excess supply or surplus of goods and services at the minimal price level, which is higher than the equilibrium price level because there would be more supply than demand for goods and services. Because these are the government's minimum pricing, they cannot be reduced. The cost can only go up, rewarding sellers instead of customers. The market can't be in balance because demand and supply aren't equal.

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Most popular questions from this chapter

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 the advent of the iPod (or other portable digital music players) on the equilibrium price and quantity of the Sony Walkman (or other portable audio cassette players).
  1. Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. In each case, state how the event will affect the supply and demand diagram. Create a sketch of the diagram if necessary.
    a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon.
    b. The winter is exceptionally cold.
    C. A major discovery of new oil is made off the coast of Norway.
    d. The economies of some major oil-using nations, like Japan, slow down.
    e. A war in the Middle East disrupts oil-pumping schedules.
    f. Landlords install additional insulation in buildings.
    g. The price of solar energy falls dramatically.
    h. Chemical companies invent a new, popular kind of plastic made from oil.

What is the difference between the supply and the quantity supplied of a product, say milk? Explain in words and show the difference on a graph with the supply curve for milk.

Table 3.8 shows the information on the demand and supply for bicycles, where the quantities of bicycles are measured in thousands.

a. What is the quantity demanded and the quantity supplied at a price of \(210?

b. At what price is the quantity supplied equal to 48,000?

c. Graph the demand and supply curve for bicycles. How can you determine the equilibrium price and quantity from the graph? How can you determine the equilibrium price and quantity from the table? What are the equilibrium price and equilibrium quantity?

d. If the price was \)120, what would the quantities demanded and supplied be? Would a shortage or surplus exist? If so, how large would the shortage or surplus be?
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