A Nonbinding Price Floor

question 28

Multiple Choice

A nonbinding price floor
(i) Causes a surplus.
(ii) Causes a shortage.
(iii) Is set at a price above the equilibrium price.
(iv) Is set at a price below the equilibrium price.

• A)(iii)only
• B)(iv)only
• C)(i)and (iii)only
• D)(ii)and (iv)only

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Definitions:

Giffen Good

A product that sees an increase in demand as its price rises, contrary to the law of demand, typically due to the absence of close substitutes and the product being an inferior good.

Perfect Complements

Goods that are consumed together in fixed proportions, where the utility of one item increases with the consumption of the other.

Income Effect

The change in consumption that results from a change in real income (purchasing power), holding prices constant, reflecting how higher income increases consumption of goods while lower income reduces it.

Income Effect

The change in an individual's consumption choices resulting from a change in their real income.