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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, not lower. It is set above the equilibrium price to protect suppliers and ensure they receive a minimum price for their products or services.

Step by step solution

01

Understanding Price Floors

A price floor is a government-imposed limit on how low a price can be charged for a product or service. It is usually set above the equilibrium price, where the supply and demand forces would naturally meet. The purpose of a price floor is to protect suppliers (producers) from predatory pricing, help low-wage workers, or to prevent prices from falling too much if there is a sudden increase in supply.
02

Price Floor Effects on Prices

By imposing a price floor above the equilibrium price, the government forces the price to be higher than what the natural market forces would dictate. This means that the price of the product or service is not allowed to go below the set price floor. As a result, the price is kept higher, which benefits suppliers by ensuring they receive a minimum price for their goods.
03

Conclusion

A price floor attempts to make a price higher, not lower. It is set above the equilibrium price to protect suppliers and ensure they receive a minimum price for their products or services.

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Most popular questions from this chapter

Why would a free market never operate at a quantity greater than the equilibrium quantity? Hint: What would be required for a transaction to occur at that quantity?

Most government policy decisions have winners and losers. What are the effects of raising the minimum wage? It is more complex than simply producers lose and workers gain. Who are the winners and who are the losers, and what exactly do they win and lose? To what extent does the policy change achieve its goals?

Name some factors that can cause a shift in the supply curve in markets for goods and services.

When the price is above the equilibrium, explain how market forces move the market price to equilibrium. Do the same when the price is below the equilibrium.

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