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Question
Macroeconomics
Posted 3 months ago

The demand and supply schedules for lawn mowing are given below:
\begin{tabular}{lll} 
Price & Quantity demanded & Quantity Supplied \\
\hline$20\$ 20 & 0 & 12 \\
$18\$ 18 & 2 & 10 \\
$16\$ 16 & 2 & 8 \\
$14\$ 14 & 3 & 6 \\
$12\$ 12 & 4 & 4 \\
$10\$ 10 & 5 & 2 \\
$8\$ 8 & 6 & 0
\end{tabular}

Which of the following is a binding (in other words, effective) price floor in this market?

Choose 1 answer:
(A) $8\$ 8
(B) $0\$ 0
(C) $14\$ 14
(D) $12\$ 12
(E) $10\$ 10
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Answer from Sia
Posted 3 months ago
Solution
a
Definition of a Binding Price Floor: A binding price floor is a minimum price set by the government above the equilibrium price, causing a surplus in the market
b
Identifying the Equilibrium Price: The equilibrium price is where the quantity demanded equals the quantity supplied. From the table, this occurs at $12, where the quantity demanded and supplied are both 4
c
Determining the Binding Price Floor: A binding price floor must be higher than the equilibrium price. It is the lowest price among the options given that is above the equilibrium price and results in a surplus (quantity supplied is greater than quantity demanded)
d
Analysis of Options: - (A) 8isbelowtheequilibriumprice,soitisnotabindingpricefloor.(B)8 is below the equilibrium price, so it is not a binding price floor. - (B) 0 is not a realistic price floor as it is below all listed prices. - (C) 14resultsinaquantitydemandedof3andaquantitysuppliedof6,creatingasurplus.(D)14 results in a quantity demanded of 3 and a quantity supplied of 6, creating a surplus. - (D) 12 is the equilibrium price, so it cannot be a binding price floor. - (E) $10 is below the equilibrium price, so it is not a binding price floor
Answer
(C) $14
Key Concept
Binding Price Floor
Explanation
A binding price floor is set above the equilibrium price and causes a surplus by forcing the price to be higher than what the market would naturally set, resulting in a quantity supplied that is greater than the quantity demanded. In this case, a price floor of 14iseffectivebecauseitisabovetheequilibriumpriceof14 is effective because it is above the equilibrium price of 12 and results in a surplus.

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