The surpluses associated with a binding price floor will be the smallest when
A) supply is highly elastic and demand is highly inelastic.
B) both supply and demand are unit elastic.
C) both supply and demand are highly inelastic.
D) both supply and demand are highly elastic.
E) supply is highly inelastic and demand is highly elastic.

Question

Quizplus · Accepted Answer

The smallest surpluses associated with a binding price floor occur when both supply and demand are highly inelastic. This is because inelasticity means that the quantity demanded and quantity supplied do not change much in response to changes in price. Therefore, even though the price floor causes a surplus, it will be relatively small because both buyers and sellers are not very responsive to changes in price.

The Surpluses Associated with a Binding Price Floor Will Be