Answer-If the government imposes a binding price floor in a competitive market, what will be the immediate...

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A price floor is a government-mandated minimum price that can be charged for a good or service. For a price floor to be binding meaning it actually has an effect on the market, it must be set above the natural equilibrium price.       Why B is Correct    Price Increase Since the floor is binding set above equilibrium, the market price is legally forced upward. Sellers cannot charge the lower equilibrium price.   Creation of a Surplus At this higher price, two things happen simultaneously    Law of Demand Consumers are less willing to buy the product at a higher price, so the Quantity Demanded QD decreases.   Law of Supply Producers are more willing to sell the product at a higher price to increase profits, so the Quantity Supplied QS increases.    Result Because QS  QD, a surplus or excess supply is created.        Why Other Options are Incorrect    A is incorrect The price cannot decrease to clear the supply because the law forbids the price from falling below the floor.   C is incorrect Shortages are caused by price ceilings maximum prices set below equilibrium, not price floors.   D is incorrect If a floor is binding, it forces the price away from equilibrium. A floor only has no effect and stays at equilibrium if it is non-binding set below the equilibrium price.

If the government imposes a binding price floor in a competitive market, what will be the immediate effect on the market price and the quantity traded?

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