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If a government sets a price floor below the market equilibrium price, what is the expected effect on quantity supplied and quantity demanded compared to what a price floor set above equilibrium would do?
AA below-equilibrium floor still creates a surplus, just like an above-equilibrium floor
BA below-equilibrium floor creates a shortage instead of a surplus
CA below-equilibrium floor has no legal effect on the market at all times
DA below-equilibrium floor is not binding, so the market simply reaches its normal equilibrium
Answer & Solution
Correct answer: D. A below-equilibrium floor is not binding, so the market simply reaches its normal equilibrium
1. A price floor only changes market outcomes when it sits above the equilibrium price, forcing price up from where it would otherwise settle.
2. If the floor is set below equilibrium, the market's own equilibrium price already clears above the floor.
3. In that case buyers and sellers can still freely reach equilibrium, since the floor never actually binds.
4. Options A and C wrongly assume the floor always changes the outcome, regardless of where it is set relative to equilibrium.
_Source: OpenStax Principles of Macroeconomics for AP Courses (CC BY 4.0), Ch 3 "Demand and Supply", section 3.4 | Price Ceilings and Price Floors_
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