MC Qu. 62 A government-set price floor on a...

A government-set price floor on a product

BlackTom Analysis

Question

MC Qu. 62 A government-set price floor on a...

A government-set price floor on a product

BlackTom Analysis

BlackTom AI · Accepted Answer

Question and options restated for clarity:
- Question: A government-set price floor on a product does what?
- Options:
  1) does not interfere with the rationing function of price in a market system.
  2) will drive resources away from the production of the product.
  3) is intended to benefit the buyers of the product.
  4) will attract more resources towards the production of the product.

Now, step-by-step analysis of each option:

Option 1: "does not interfere with the rationing function of price in a market system."
- Interpretation: A price floor is a legal minimum price; if set above equilibrium, it alters the market by creating a surplus and changing allocation. It clearly interferes with how prices ration scarce resources.
- Why this is wrong: In practice, a floor distorts rationing by preventing the market from clearing at equilibrium prices, leading to excess supply. Therefore, claiming no interference is incorrect.

Option 2: "will drive resources away from the production of the product."
- Interpretation: If a price floor raises the price above the market-clearing level, producers have a greater incentive to produce, not less, because the higher price improves potential profits.
- Why this is wrong: The higher price typically encourages more production, not less, so the statement that resources are driven away is opposite to the usual effect of a price floor above equilibrium.

Option 3: "is intended to benefit the buyers of the product."
- Interpretation: Price floors set a minimum price, which tends to benefit sellers (producers) by maintaining higher prices, while buyers may face higher costs or reduced availability.
- Why this is wrong: This is a classic misattribution; the policy generally protects producers, not buyers, so claiming it benefits buyers is inaccurate.

Option 4: "will attract more resources towards the production of the product."
- Interpretation: A price floor above equilibrium raises the potential profit for producing the good, which provides an incentive for firms to allocate more labor, capital, and other resources to its production.
- Why this is correct: The higher price signal reduces the opportunity cost of resources for that product and encourages investment and production, so resources are more likely to be drawn into producing it, all else equal. This aligns with standard supply-side responses to higher prices created by price floors.

In summary, the first three options describe common misperceptions about price floors—either ignoring the distortion, assuming production would fall, or misattributing benefits to buyers—whereas the fourth option correctly captures the incentive mechanism by which a government-set price floor above equilibrium tends to pull resources into production. The reasoning here relies on basic price-signal theory: higher enforced prices make production more attractive, attracting factors of production toward that good.

MC Qu. 62 A government-set price floor on a... A government-set price floor on a product BlackTom Analysis

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