Suppose That a Price Floor Is Established and the Government

question 60

Multiple Choice

Suppose that a price floor is established and the government declares that it will purchase any excess supply.Which of the following statements best characterizes the loss of total economic surplus that results from this change?

• A) Consumers are encouraged to consume too much.
• B) The extra cost of the last unit produced is greater than the extra benefit of the last unit consumed.
• C) Producers are encouraged to produce too little.
• D) Firms will spend too little on political contributions to maintain the price floor.
• E) The enforcement of the price floor is extremely costly.

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Definitions:

Contribution Margin

The amount remaining from sales revenue after variable expenses have been deducted, indicating how much contributes to covering fixed costs and profit.

Fixed Costs

Expenses that do not vary with the level of production or sales, such as rent, salaries, and insurance premiums.

Unit Variable Cost

It's the cost associated with producing one additional unit of product, including materials, labor, and other costs that vary with production output.

Overall Product

The complete final product resulting from a manufacturing or production process.