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Chapter 3: Problem 29

Does a price floor attempt to make a price higher or lower?

Short Answer

Expert verified
A price floor attempts to make a price higher, as it prevents the market price from falling below a certain level and is set above the equilibrium price. This leads to higher prices than those in a competitive market without intervention.

Step by step solution

01

Understanding Price Floor

A price floor is an economic term that refers to the minimum legal price at which a good, service, or commodity can be sold in the market. Governments usually impose price floors to protect the interest of producers or ensure a fair return to them. This measure prevents the market price of a good or service from falling below its minimum level.
02

Evaluating the Effect of Price Floor

A price floor is set above the equilibrium price, which is the price that would naturally occur in a competitive market without intervention. When a price floor is established, it means that market participants cannot legally sell below the specified threshold or minimum price. In summary, a price floor aims at making the price of a good or service higher, as it prevents the market price from falling below a certain level. This leads to higher prices than what the competitive market considers as the equilibrium price.

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