If a government eliminated an effective price floor in a market, all of the following would occur EXCEPT: The supply of the good would increase. The quantity demanded would increase. Answer D: The quantity demanded would increase. The quantity supplied would decrease. Answer C: The quantity supplied would decrease. The price would decrease. Answer B: The price would decrease. The surplus would be eliminated. Answer A: The surplus would be eliminated.
The Correct Answer and Explanation is:
Correct Answer: The supply of the good would increase.
Explanation:
A price floor is a minimum legal price set by the government, typically above the equilibrium price, to ensure producers receive a certain level of income. Common examples include minimum wage laws or agricultural price supports. When an effective price floor is in place, the price of the good is kept artificially high, resulting in a quantity supplied that exceeds the quantity demanded. This creates a surplus in the market.
If the government eliminates this effective price floor, the market is allowed to return to its natural equilibrium. As a result, several things will happen:
- The price of the good will decrease because it is no longer held above equilibrium. This encourages more buyers to enter the market.
- The quantity demanded will increase because lower prices make the good more attractive to consumers.
- The quantity supplied will decrease because lower prices reduce the incentive for producers to supply as much of the good.
- The surplus that existed under the price floor will be eliminated, as the market moves toward equilibrium where quantity demanded equals quantity supplied.
All of the above are logical and expected outcomes from eliminating a price floor. However, one statement stands out as incorrect:
- “The supply of the good would increase” is not a correct prediction. In fact, supply refers to the relationship between price and quantity supplied, and it does not shift simply due to a change in price. Instead, what changes in this context is the quantity supplied, which decreases due to the lower price. The supply curve itself remains unchanged unless there is a shift in production conditions or input costs.
Therefore, the correct answer is: The supply of the good would increase because it is the only statement that does not correctly describe the outcome of eliminating an effective price floor.
