Question

Suppose the government decides to eliminate a binding price floor that it had previously imposed on a particular good. It can be expected that o o -16: A. the price would decrease, the quantity demanded would increase and the quantity supplied would decrease. B. the price would increase, the quantity demanded would decrease and the quantity supplied would increase. C. the price would increase, the quantity demanded would increase and the quantity supplied would decrease. D. the price would decrease, the quantity demanded would decrease and the quantity supplied would increase. E no changes would take place. оо Consider the income and substitution effects of price changes. If the price of a normal good changes, the income effect of the price change will O a A. produce a positively sloped demand curve. B. oppose the substitution effect. C. reinforce the substitution effect. D. always be to increase quantity demanded. E. always be larger than the substitution effect. O

Answer 1

1) A binding price floor occurs when the government sets a price above the equilibrium. Thus when it is abolished, price will decline. This will lead to an increase in quantity demanded and decrease in quantity supplied, restoring the equilibrium in the market. Hence the answer is option (A).