Question

Which statement(s) is TRUE?
I. Price floors are legally established minimum prices for goods and services.
II. Price floors create surpluses, whereas price ceilings create shortages.
III. Price floors reduce quality of goods and services

Answer 1

The correct option would be

• I. Price floors are legally . . .
• II. Price create surpluses, whereas . . .

The price floor is the minimum price that can be charged in the market for transaction, which is legally established in the market (usually by government or any other social institution). An effective price ceiling is set at a price greater than the equilibrium price in the market. At that price, there is excess supply, which creates surpluses. An effective price ceiling (maximum price that can be legally charged in the market) on the other hand, creates shortages. But, it is price ceiling which may lead to deteriorate the quality of goods and service. In case of excess demand, where price is set where quantity demanded is more than quantity supplied, the producers tend to reduce the quality of the product (as a trade-off for lower prices of their product). But in case of price floors, producers get a price that is more than required (equilibrium price) and the quality of the product faces no such issues. Besides, if the quantity supplied is greater than the quantity demanded, the quality of the product is not supposed to deteriorate since the product have less demand and aim is to increase the product's demand (doesn't imply that quality increases in this case as that would alter/increase the cost of product).