Question

Suppose market demand and supply are given by Q_d= 400-12P and Q_s= -20 + 8P. If a price floor of $20.00 is imposed,

1. there will be a surplus of 10 units.
2. there will be neither a surplus or shortage.
3. there will be a shortage of 16 units.  
4. None of the above choices makes any sense in this case.

Answer 1

The price floor is fixed at price of $20.

Calculate the market demand at the price floor -

Qd = 400 - 12P

Qd = 400 - (12 * 20)

Qd = 400 - 240

Qd = 160

The market demand at the price floor is 160 units.

Calculate the market supply at the price floor -

Qs = -20 + 8P

Qs = -20 + (8 * 20)

Qs = -20 + 160

Qs = 140

The market supply at price floor is 140 units.

In the given case, at the price floor, market demand exceeds the market supply.

It should be noted that price floor can only be effective when the price floor is fixed at a price that is greater than the equilibrium price.

So, price floor resulted in a price that is greater than the equilibrium price.

At a price greater than the equilibrium price, quantity supplied exceeds the quantity demanded.

In the given case, at the price floor is fixed, quantity demanded exceeds the quantity supplied.

This is not possible in case of effective price floor.

So, the given price floor is not an effective price floor.

Hence, the correct answer is the option (d) [None of the above choices make any sense in this case].