In price theory, a price floor is defined as which of the following in relation to the legally allowed price for a good or service?

Introduction / Context:
This question checks your understanding of government intervention in markets through price controls. A price floor is one of the two common forms of price control, the other being a price ceiling. Knowing the correct definition of a price floor and how it differs from equilibrium price and other concepts is important for analysing agricultural support prices, minimum wages, and similar policies.

Given Data / Assumptions:

• The term under consideration is "price floor".
• The options mention maximum or minimum legal prices and other equilibrium related descriptions.
• We need to identify the correct definition that matches standard microeconomic terminology.

Concept / Approach:
A price floor is a legally imposed minimum price below which a good or service cannot be sold. Governments often set price floors to protect producers, such as minimum support prices for crops or minimum wages for labour. Unlike the equilibrium price determined by supply and demand, a price floor is an administrative measure. If the price floor is set above the equilibrium price, it can lead to excess supply or surplus. It is the opposite of a price ceiling, which is a maximum legal price.

Step-by-Step Solution:
Step 1: Recall the definition of a price ceiling: a maximum legal price. Step 2: Recall the definition of a price floor: a minimum legal price that cannot be undercut. Step 3: Compare this with the options. Option A describes a maximum legal price, which is actually a price ceiling. Step 4: Option B describes a minimum legal price, which fits the definition of a price floor. Step 5: Option C refers to the equilibrium price where demand equals supply and is not a government imposed floor. Step 6: Option D refers to a condition on elasticities and is not related to the legal minimum price concept.

Verification / Alternative check:
Consider the example of minimum wage. The government may set a minimum wage that employers are legally prohibited from paying below. This is a price floor in the labour market. Similarly, a minimum support price for farmers' produce is a price floor in the agricultural market. In all such cases, the key idea is a minimum legal price, not a maximum. This real world understanding confirms that a price floor is indeed a minimum legal price.

Why Other Options Are Wrong:
Option A is the definition of a price ceiling, which is a maximum legal price set to protect consumers from high prices, such as in rent control. Option C describes the equilibrium price where the free market without intervention sets the price that clears the market, but this is not a price control. Option D involves elasticities of demand and supply, which describe sensitivity to price changes, not the legal limit on price levels. Only option B matches the standard definition of a price floor.

Common Pitfalls:
Students often mix up price ceilings and price floors due to the similarity of the words. A good way to remember is that a ceiling is above you and limits how high you can go, while a floor is below you and sets the lowest point you can go. Another pitfall is confusing equilibrium price with controlled prices. Carefully distinguishing between market determined and government set prices helps avoid mistakes.

Final Answer:
A price floor is a minimum legal price set by the government or a regulating authority.