Consider the market for pulp and paper. Suppose, in an attempt to help this industry, the government sets a price floor above the free- market equilibrium price. The result will be:
A) a new free- market equilibrium at a higher price and lower output level.
B) a continuation of the market- determined equilibrium price and quantity.
C) the quantity supplied will exceed quantity demanded and there will be a surplus in the market.
D) increased government revenue.
E) the quantity demanded will exceed quantity supplied and there will be a shortage in the market.

Question

Quizplus · Accepted Answer

When a price floor is set above the free-market equilibrium price, it creates an artificial surplus in the market since quantity supplied will exceed quantity demanded at the higher price. This surplus represents unsold inventory sitting on shelves, which may lead to increased costs for the pulp and paper companies. Therefore, choice C is the best answer.

Consider the Market for Pulp and Paper