Explain how a price floor set above the equilibrium market price for a good can cause a surplus of that good
What will be an ideal response?
At the market equilibrium price, the quantity demanded equals the quantity supplied. If a price floor is set above the equilibrium price, the price floor has two separate effects and both help create a surplus of the good. First, the higher price increases the quantity supplied. Second, the higher price decreases the quantity demanded. On both counts—the increase in the quantity supplied and the decrease in the quantity supplied—a surplus is created.
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Which of the following statements is true of market prices in a perfectly competitive market?
A) Market prices are determined by the government. B) Market prices allow for efficient allocation of scarce resources. C) Market prices are not stable and fluctuate widely. D) Market prices do not act as incentives for buyers.
Molly received an autographed poster of David Hasselhoff for her 21st birthday
Her friend Helga offered her $50 for the poster, but Molly refused to sell the poster even though she knows she would never pay that much to replace it if it was ever damaged or destroyed. Explain this inconsistency in Molly's behavior.