Which of the following best describes how to illustrate a binding price floor on a supply and demand graph?

• A. Draw a vertical line at the equilibrium quantity to represent the price floor.
• B. Draw a horizontal line below the equilibrium price to represent the maximum legal price.
• C. Draw a horizontal line at the equilibrium price to represent the price floor.
• D. Draw a horizontal line above the equilibrium price to represent the minimum legal price.

Answer: (D)

Verified step by step guidance

1. Understand that a price floor is a legally imposed minimum price that sellers can charge for a good or service.
2. Recall that the equilibrium price is where the supply and demand curves intersect, representing the market-clearing price without intervention.
3. Recognize that a binding price floor must be set above the equilibrium price to have an effect; if it is below, it is non-binding and irrelevant.
4. To illustrate a binding price floor on a supply and demand graph, draw a horizontal line at a price level above the equilibrium price, indicating the minimum legal price sellers can charge.
5. Note that this horizontal line above equilibrium creates a surplus because quantity supplied exceeds quantity demanded at that price.