Suppose the government sets a price floor of $2.85 per bushel on corn when the current price is $2.55.This price floor will:
A)cause a surplus of corn.
B)cause a shortage of corn.
C)have no immediate effect on the price of corn.
D)increase the supply of corn.

Question

Quizplus · Accepted Answer

A price floor is a minimum price set by the government above the equilibrium price. In this case, the price floor of $2.85 is above the current market price of $2.55, so it will not have an immediate effect on the price of corn. However, it will create a surplus of corn because the quantity supplied will exceed the quantity demanded at the higher price. This surplus will lead to a buildup of inventory and downward pressure on the price of corn over time.

Suppose the Government Sets a Price Floor of $2