A surplus may occur if: a. the government imposes a price ceiling. b. the government imposes...

A surplus may occur if:

a. the government imposes a price ceiling.

b. the government imposes a price floor.

PLEASE ANSWER ONLY IF YOU ARE 100% CORRECT

Solutions

Expert Solution

A price ceiling means legal maximum price, i.e. price charged can't be above the price ceiling level. If a price ceiling is set below the market equilibrium, then it will act as binding and effective as the market won't be able to reach the equilibrium. In this case, quantity demanded will be greater than the quantity supplied, resulting in a shortage. But if the price ceiling is set above the equilibrium, then it won't act as binding or effective because the market will be able to operate at the equilibrium easily.

Price floor is a legal minimum price which means price can't be lowered below the price floor level. If a price floor is set below the equilibrium, it won't be effective because the market will easily be able to operate at the equilibrium. But if the price floor is set above the equilibrium, it will be binding because the market won't be able to reach the equilibrium. In this case, at this price floor, quantity supplied will be greater than the quantity demanded (as the price is above the equilibrium), resulting in a surplus.

Answer: option B

Rahul Sunny answered 1 year ago

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