If a price floor is a binding constraint on a market, then
the quantity demanded must exceed the quantity supplied.
buyers cannot buy all they want to buy at the price ceiling.
the equilibrium price must be above the price floor.
sellers cannot sell all they want to sell at the price ceiling.
The Correct Answer and Explanation is :
The correct answer is: “sellers cannot sell all they want to sell at the price ceiling.”
Explanation:
A price floor is a minimum allowable price set by the government or a regulatory authority, and it is typically enforced to ensure that sellers can cover their costs and earn a reasonable profit. When a price floor is “binding,” it means that the price floor is set above the equilibrium price of the market, preventing the market price from adjusting down to where supply and demand would naturally meet.
- Quantity Demanded vs. Quantity Supplied:
When the price floor is set above the equilibrium price, it leads to a situation where the quantity supplied exceeds the quantity demanded. Sellers want to sell more at the higher price, but buyers are not willing to purchase as much at that price. This creates a surplus in the market. So, the statement “the quantity demanded must exceed the quantity supplied” is incorrect because a surplus occurs, not a shortage. - Price Ceiling Misconception:
A price ceiling, on the other hand, is a maximum allowable price, which is different from a price floor. If a price ceiling is binding (set below the equilibrium price), it creates a shortage, as the price is artificially lowered, and buyers demand more than suppliers are willing to offer. The given choices that mention “price ceiling” are not relevant to the concept of a price floor. - Equilibrium Price and Price Floor:
The equilibrium price does not need to be above the price floor for the price floor to be binding. In fact, a price floor is binding if it is above the equilibrium price. If the equilibrium price were above the price floor, the price floor would not have any effect on the market.
Thus, when a price floor is binding, the higher price means sellers are not able to sell as much as they would like, creating a surplus of goods in the market.
I will generate a visual representation of this concept now.
Here is a visual representation of a price floor in a market. As you can see, the price floor is set above the equilibrium price, causing the quantity supplied to exceed the quantity demanded, resulting in a surplus. This illustrates the concept where sellers are unable to sell all they want to sell at the higher price. Let me know if you need further details!