Which of the following is a primary reason why governments set price floors?

• A. To prevent shortages in the market
• B. To encourage consumers to buy more of a product
• C. To ensure producers receive a minimum income for their goods or services
• D. To reduce the equilibrium price below the market level

Answer: (C)

Verified step by step guidance

1. Understand what a price floor is: A price floor is a legally established minimum price that must be paid for a good or service, set above the equilibrium price to be effective.
2. Recall the effects of a price floor: When set above equilibrium, it can lead to a surplus because the quantity supplied exceeds the quantity demanded at that price.
3. Analyze the motivations behind setting a price floor: Governments often set price floors to protect producers by ensuring they receive a minimum income, especially in markets like agriculture or labor (minimum wage).
4. Evaluate the incorrect options: Preventing shortages is typically addressed by price ceilings, not floors; encouraging consumers to buy more usually requires lower prices, not higher; reducing equilibrium price is contrary to what a price floor does.
5. Conclude that the primary reason for a government to set a price floor is to guarantee producers a minimum income for their goods or services, supporting their economic stability.