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Chapter 4: Q11 (page 104)

Select the correct answer. A price floor will usually shift:

a. demand

b. supply

c. both

d. neither

Illustrate your answer with a diagram.

Short Answer

Expert verified

Price Floor will shift : d) Neither demand, nor supply.

Step by step solution

01

Price Floor Concept 

Price Floor is the minimum mandated price of a commodity, fixed by regulatory body, to protect the interests of sellers and prevent them from being exploited.

Example : Minimum support price of agricultural goods.

02

Detail Explanation 

Price Floor is just an imposed price, above the equilibrium price - ie where demand & supply curves intersect.

It doesn't shift either demand or supply curve, just fixes a price above their intersection point. A change in the price can cause movement along the existing demand and supply curves, but not a shift.

03

Diagram 

The equilibrium price is where demand & supply (D & S) intersect, denoted by P.

The floor price is set above equilibrium price at P*. As evident, it has shifted neither demand nor supply.

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