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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Which of the following would increase quantity supplied, decrease quantity demanded, and increase the price that consumers pay?

a. the imposition of a binding price floor

b. the removal of a binding price floor

c. the passage of a tax levied on producers

d. the repeal of a tax levied on producers

To determine
The reason for the increase in the quantity supplied, decrease in quantity demanded, and increase in the consumer price.

Explanation

The price floor is the minimum price that can be charged for the product in the market. This is to prevent the prices from going too low and make loss to the producers and service providers. The most common price floor is the minimum wages set by the government. The labors should be paid minimum wages when their service is rendered. Similarly, the price ceiling is the maximum limit price that can be charged for a good or service in the market. This is to prevent the prices from going too high and prevent the exploitation of the consumers. The best given examples of the price ceiling include the rent controls, price controls on gasoline in the 1970s and the price ceilings on water during the drought etc.

Option (a):

When there is a price floor in the economy, then, the producers will get a minimum of the floor price and this will increase the revenue of the producers. This minimum guaranteed price would be higher than the equilibrium price and as a result, it will lead to the increased supply by the producers than the decreasing demand in the economy. Thus, the price floor leads to the economic surplus in the economy...

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