If a price floor is not binding, which of the following is true?

• A. The price floor is set below the equilibrium price and has no effect on the market outcome.
• B. The price floor is set at the equilibrium price and creates a shortage.
• C. The price floor is set below the equilibrium price and causes a shortage.
• D. The price floor is set above the equilibrium price and causes a surplus.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what a price floor is — it is a legally imposed minimum price that sellers can charge for a good or service.
2. Step 2: Recall that a price floor is binding only if it is set above the equilibrium price, meaning it forces the market price to be higher than what would naturally occur.
3. Step 3: If the price floor is set below the equilibrium price, it is non-binding because the market price is already higher, so the floor does not affect the market outcome.
4. Step 4: Recognize that a binding price floor (above equilibrium) typically causes a surplus because quantity supplied exceeds quantity demanded at that higher price.
5. Step 5: Conclude that if the price floor is not binding, it means it is set below the equilibrium price and therefore has no effect on the market equilibrium or quantities traded.