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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, not lower. It is set above the equilibrium price to protect suppliers and ensure they receive a minimum price for their products or services.

Step by step solution

01

Understanding Price Floors

A price floor is a government-imposed limit on how low a price can be charged for a product or service. It is usually set above the equilibrium price, where the supply and demand forces would naturally meet. The purpose of a price floor is to protect suppliers (producers) from predatory pricing, help low-wage workers, or to prevent prices from falling too much if there is a sudden increase in supply.
02

Price Floor Effects on Prices

By imposing a price floor above the equilibrium price, the government forces the price to be higher than what the natural market forces would dictate. This means that the price of the product or service is not allowed to go below the set price floor. As a result, the price is kept higher, which benefits suppliers by ensuring they receive a minimum price for their goods.
03

Conclusion

A price floor attempts to make a price higher, not lower. It is set above the equilibrium price to protect suppliers and ensure they receive a minimum price for their products or services.

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