Problem 11 Select the correct answer. A pri... [FREE SOLUTION]

Chapter 4: Problem 11

Select the correct answer. A price floor will usually shift: a. demand b. supply c. both d. neither Illustrate your answer with a diagram.

Short Answer

Expert verified

The correct answer is d. neither. A price floor does not shift the demand or supply curve; instead, it changes the market equilibrium, leading to a new price and quantity level. To illustrate this, draw a supply and demand graph with a price floor above the equilibrium price. The result is a surplus or excess supply in the market, as suppliers are willing to supply more goods at the higher price, but demand drops since consumers' willingness to pay decreases. The demand and supply curves remain unchanged; only the equilibrium point is affected.

Step by step solution

Understand the concept of a price floor

A price floor is a minimum price set by the government or any regulatory body, below which the product or service price cannot be legally traded. Price floors are established with the intention of protecting the income of producers and ensuring that they receive a fair price for their goods. Step 2:

Study the market equilibrium

The market equilibrium is the point where the supply and demand curves intersect. At equilibrium, the quantity supplied equals the quantity demanded, and the market price is determined. Step 3:

Analyze the impact of price floor on demand and supply

When a price floor is introduced above the equilibrium price, it affects the market because suppliers are willing to supply more goods at a higher price, but demand drops since consumers' willingness to pay decreases. The result is a surplus or excess supply in the market. A price floor does not shift the demand or supply curve; instead, it changes the market equilibrium, leading to a new price and quantity level. Step 4:

Select the correct answer

Based on the analysis, a price floor will not shift the demand or supply curve; hence the correct answer is: d. neither Step 5:

Illustrate the answer with a diagram

To illustrate the impact of a price floor on the market, draw a supply and demand graph: 1. Draw a downward-sloping demand curve (D) and an upward-sloping supply curve (S). Label both curves. 2. Identify the equilibrium point (E) where the demand and supply curves intersect. Mark the equilibrium price (P*) and quantity (Q*). 3. Introduce a price floor (PF) above the equilibrium price level. 4. Draw a horizontal line at the price floor level, representing the new minimum price. 5. Identify new quantities supplied (QS) and demanded (QD) at the amended price level. QS > QD due to the price floor. 6. The difference between QS and QD represents the surplus in the market. This diagram will clearly show that the demand and supply curves remain unchanged with the introduction of a price floor, and it is the equilibrium point that is affected, causing an excess supply or surplus of goods in the market.