Assume an industry initially in equilibrium has a price floor imposed at a price above the equilibrium price. Total revenue received by the producers from sales will:
A)rise as a result.
B)rise as a result only if supply is elastic.
C)rise as a result only if demand is elastic.
D)rise as a result only if demand is inelastic.

Question

Assume an industry initially in equilibrium has a price floor imposed at a price above the equilibrium price. Total revenue received by the producers from sales will:
A)​rise as a result.
B)​rise as a result only if supply is elastic.
C)​rise as a result only if demand is elastic.
D)​rise as a result only if demand is inelastic.

Quizplus · Accepted Answer

When a price floor is imposed above the equilibrium price, it will result in a surplus of the product as producers will produce more than consumers demand at that price. In the short run, the total revenue received by producers may increase because the higher price may compensate for the decrease in quantity sold. However, this increase in revenue will only happen if demand is inelastic, meaning consumers are not very sensitive to changes in price and will continue to buy the product even at higher prices. If demand is elastic, consumers will switch to substitute products, and the increase in price will result in a decrease in revenue for producers. Therefore, D is the best choice as revenue will rise only if demand is inelastic.

Assume an Industry Initially in Equilibrium Has a Price Floor