The Impact of Price Floors on Market Surplus
What is the effect of a price floor set at $20 in a market?
a. The price floor set at $20 will not be binding.
b. The price floor set at $20 will be binding and will result in a surplus of 100 units.
c. The price floor set at $20 will be binding and will result in a surplus of 250 units.
d. The price floor set at $20 will be binding and will result in a surplus of 50 units.
Answer:
The correct statement is: c. a price floor set at $20 will be binding and will result in a surplus of 250 units.
A price floor is a minimum price set by the government above the equilibrium price in a market. When the price floor is set above the equilibrium price, it becomes binding and creates a surplus of the product. If the price floor is set at $20 and it is above the equilibrium price, it will lead to a surplus of units in the market.
The statement specifies that the surplus will be 250 units. Therefore, the correct statement is that a price floor set at $20 will be binding and will result in a surplus of 250 units.