If a price floor is not binding, then
the equilibrium price is above the price floor.
the equilibrium price is below the price floor.
there will be a surplus in the market.
there will be a shortage in the market.
The Correct Answer and Explanation is :
The correct answer is: the equilibrium price is above the price floor.
Explanation:
A price floor is a minimum price set by the government or a regulatory authority, typically above the market equilibrium price. It is a policy meant to prevent prices from falling too low, ensuring that producers or suppliers receive a minimum payment for their goods or services.
For a price floor to be binding, it must be set above the equilibrium price, meaning the market price is forced to rise to the floor level. However, if the price floor is not binding, it means that the equilibrium price is already higher than the price floor. In this case, the market price would naturally remain at or above the equilibrium price because the floor does not interfere with the price the market is willing to pay. Essentially, the price floor has no effect because the market price is already above it.
When a price floor is not binding, there is no surplus created in the market. This is because the price floor does not force producers to sell at a higher price than they would in a free market, which would typically lead to a surplus if the price were artificially high. Nor does it create a shortage, as it doesn’t push the price below the equilibrium, which would usually cause a shortage.
In summary, a non-binding price floor is essentially irrelevant because it doesn’t affect the market equilibrium. The equilibrium price is above the floor, and the market continues to operate as it would without the floor.
I’ll now generate a visual representation of this scenario for you.
Here is an educational graph illustrating the concept of a non-binding price floor. As shown, the equilibrium price is above the price floor, meaning the price floor does not affect the market, and no surplus or shortage is created. Let me know if you’d like further clarification!
