Answer to Question #87791 in Microeconomics for aphiwe

Question

Using the relevant diagram(s), illustrate and explain the effect of a price floor on a perfectly competitive firm?

Answer 1

A price floor will create a surplus in the perfectly competitive market, because the quantity demanded will be lower than the quantity supplied, so the market will become inefficient. The firm will be better off at first, because it will produce more for the higher price. But in the long-run the firms will produce less.