ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the good faces elastic demand, the rise in price will cause a disproportionately large decrease in demand, leading to smaller profits. Thus, it is important for governments to be mindful of a good’s price elasticity when setting price floors trying to protect vulnerable suppliers.

Detailed explanation-2: -An effective price floor will raise the price of a good, which means that the the consumer surplus will decrease.

Detailed explanation-3: -The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax. Tax revenue is larger the more inelastic the demand and supply are.

Detailed explanation-4: -A price floor is an established lower boundary on the price of a commodity in the market. Governments usually set up a price floor in order to ensure that the market price of a commodity does not fall below a level that would threaten the financial existence of producers of the commodity.