Answer to Question #60814 in Microeconomics for Matthew Carr

Question

Explain the economic effect of a price floor at 8$?

Answer 1

Price floors are used by the government to prevent prices from being too low. When a price floor is set a few things start to happen. Firstly, the price floor has raised the price above what it was at equilibrium, so the consumers aren't willing to buy as much quantity. The demanders will purchase the quantity where the quantity demanded is equal to the price floor, or where the demand curve intersects the price floor line. On the other hand, since the price is higher than what it would be at equilibrium, producers are willing to supply more than the equilibrium quantity. They will supply where their marginal cost is equal to the price floor, or where the supply curve intersects the price floor line.