Question

The government sometimes imposes a PRICE FLOOR on some goods and services in a specific market.
a) Give one specific real-life example. (2.5 POINTS)
b) Does a price floor create a SHORTAGE or a SURPLUS in the market? (2.5 POINTS)
c) Also, give one reason for the government to impose such a price floor in a market. Explain why. (2.5 POINTS)
d) Also, mention two (02) problems that a price floor creates in a market. Explain. (2.5 POINTS)

Answer 1

a) Minimum wage set by the government is the real life example of binding price floor.

b) Binding price floor crates surplus in the market because binding price floor is set above the equlibrium price where supply is greater than Demand, So it creates surplus in the market.

c) Price floor is mimimum/ lowest price which is set by the government at which the commodities can be sold. Government uses price floor to prevent prices from being too low. The best example of price floor is the minimum wage, because minimum wage is the minimum price that can be paid to the labour.

d) 1. The binding price floor create market inefficiency because when price set above the equlibrium price it create surplus in the market because quantity supply is greater than quantity Demand.

2 The other draw back of price floor is it create dead weight loss in the economy.