Quiz 6: Supply, Demand, and Government Policies

Business

Binding price floor: A price floor refers to a base price at which a good is sold. When the price floor is set above the equilibrium price by the government, then it is referred as binding price floor, resulting in a surplus with excess supply of the good in the market to maintain the price floor over the long term. Hence, option 'd' is correct.

The price ceiling of $40 per concert ticket is a binding constraint on the market. At this price, the number of the concert tickets demanded exceeds the quantity of tickets supplied. There will be a shortage of tickets. So the policy decreases the number of people who attend classical music concerts because the quantity supplied is lower because of the lower price.

Price floors sets a minimum price limit on the price of the commodity. It means the price can't go lower than the price set. An effective price floor is where equilibrium price is below the price floor. This will create surplus in the market. The example of price floor is minimum wage law. Price ceiling puts a maximum price limit on the price of the commodity. It means the price can't go higher than the price set. An effective price ceiling is where equilibrium price is above the price floor. This will create shortage in the market. The example of price ceiling is rent control law.