Which of the following best describes the difference between a price floor and a price ceiling?

• A. A price floor sets a minimum legal price, while a price ceiling sets a maximum legal price.
• B. A price floor sets a maximum legal price, while a price ceiling sets a minimum legal price.
• C. Both price floors and price ceilings set maximum legal prices.
• D. Both price floors and price ceilings set minimum legal prices.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of a price floor. A price floor is a government-imposed limit that sets the lowest legal price at which a good or service can be sold. This means sellers cannot legally sell below this price.
2. Step 2: Understand the concept of a price ceiling. A price ceiling is a government-imposed limit that sets the highest legal price at which a good or service can be sold. This means sellers cannot legally charge more than this price.
3. Step 3: Compare the two concepts. The key difference is that a price floor prevents prices from falling below a certain level (minimum price), while a price ceiling prevents prices from rising above a certain level (maximum price).
4. Step 4: Analyze the answer choices based on these definitions. Identify which option correctly states that a price floor sets a minimum legal price and a price ceiling sets a maximum legal price.
5. Step 5: Conclude that the correct description is: 'A price floor sets a minimum legal price, while a price ceiling sets a maximum legal price.' This matches the fundamental definitions of these price controls.