One of the problems created by price floors set above the equilibrium is:
A) the effect on firm profitability.
B) firms don't have incentives to reduce costs.
C) the creation of surplus.
D) how to cope with the shortages.

Question

Quizplus · Accepted Answer

When a price floor is set above the equilibrium price, it creates a surplus – meaning that the quantity supplied exceeds the quantity demanded. This surplus can be wasteful as it represents resources that could have been put to better use elsewhere. Additionally, firms may not have an incentive to reduce costs because they are guaranteed a higher price, which can lead to inefficiencies in production. While firm profitability may be affected, this is not necessarily a problem created by price floors, but rather a consequence of them. Similarly, shortages are a consequence of price ceilings, not price floors.

One of the Problems Created by Price Floors Set Above