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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Identify the most accurate statement. A price floor will have live largest effect if it is set:

a. substantially above the equilibrium price

b. slightly above the equilibrium price

c. slightly below the equilibrium price

d. substantially below the equilibrium price

To determine

The largest effect of price among the given options and identify the correct option.

Explanation

A price floor prevents a price falling below a certain minimum level. So, it prevents the market to crash. Let us identify each and every given alternative one by one in this case.

a) If price floor is substantially above the equilibrium price then the there will be more suppliers to supply the product but the demand is less because people will not be ready to take above the market price. That means it creates supply surplus as shown in the following diagram (fig.1)

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