When is a price floor NOT binding

Question

Quizplus · Accepted Answer

A price floor is only binding when it is set above the equilibrium market price. If the price floor is set lower than the equilibrium price, then it has no effect on the market because the market is already naturally pricing the good above the price floor. Therefore, choice B is the correct answer. Choice A is incorrect because a price floor that is set above the equilibrium market price will lead to a surplus of the good. Choice C is incorrect because the willingness of buyers to buy less does not determine whether a price floor is binding or not. Choice D is also incorrect because the fact that the government sets the price floor does not determine whether it is binding or not.

When Is a Price Floor NOT Binding