Question

In the lower of cost or market rule, net realizable value is referred to as the:

A. ceiling.
B. floor.
C. wall.
D. current market.

Answer 1

A price floor will have the largest effect if it is set substantially above the equilibrium price.

Step-by-step explanation:

The correct answer is a. substantially above the equilibrium price. A price floor is a government-imposed minimum price set above the equilibrium price in a market. When a price floor is substantially above the equilibrium price, it has the largest effect because it creates a surplus of the product and leads to a decrease in transactions.

To illustrate this, we can refer to the demand and supply diagram. When a price floor is set substantially above the equilibrium price, the resulting graph will show the supply curve intersecting the demand curve at a point below the price floor. The quantity supplied will be greater than the quantity demanded, resulting in excess supply and a surplus of the product.