Question

Assuming a binding price floor, the more inelastic the supply and the demand curves are, the:1'smaller the shortage a price floor will create.2.greater the shortage a price floor will create.3.smaller the surplus a price floor will create.4.greater the surplus a price floor will create.

Answer 1

Answer:

3) smaller the surplus a price floor will create.

Explanation:

A binding price floor will always create a supply surplus because the price is set above equilibrium price (that is why it is binding). So suppliers will increase the quantity supplied, but consumers will decrease the quantity demanded. This will cause a loss of economic efficiency and a deadweight loss.

If the supply curve is inelastic, then the surplus will be smaller because an increase in the price will result in a proportionally smaller increase in the quantity supplied.

Similarly, if the demand curve is inelastic, the quantity demanded will decrease in a smaller proportion than the price increase.

A combination of both inelastic curves will result in a smaller surplus created by the binding price floor.

Answer 2

Answer:

Option "3" is the correct answer.

Explanation:

Inelastic demand curve depict when there's no evident increase in demand due to an increase in price.