The following are correct statements about a Price Floor, except one: "It is a regulated price above the equilibrium price." "It creates an excess of supply in the market." "It increases total consumer's surplus." "It creates a dead weight loss." Which one is incorrect?


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Lynn Blakeman Profile
Lynn Blakeman answered

It seems that the first sentence is incorrect: "It is a regulated price above the equilibrium price."

To the best of my knowledge the price is not regulated, although it is true that the price floor should be above the equilibrium price.

A price floor is the lowest legal price that something can be sold at. The government set price floors to prevent things from being sold too cheaply. That includes labour, which is why we have a minimum wage, the price floor is the minimum wage.

A price floor is placed on a market with the intention of keeping the price high, if the market in question is competitive, this creates a surplus, or excess supply. This happens because more is being produced that customers are willing to purchase at that price.

In the employment market there are more people actively looking to find work that there are jobs available which can meet the minimum wage, this creates unemployment.

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