Question

A price floor is

A.

almost always equal to the price ceiling.

B.

the highest possible legal price that can be charged for a good or service.

C.

the lowest legal price at which a good or service can be traded.

D.

a legal price of zero that can be charged for a good or service.

E.

usually equal to the equilibrium price established before the government imposed the price floor

Answer 1

C. Price floor means the lowest limit of the price at which a good or a service can be traded. It is’ legal price’ since it is fixed by the government. Usually in case of agricultural products especially in cases of process of food grains and so on , in order to protect the interest of the farmer the government intervenes and fixes the price floor.

For example , the government fixes the price floor for food grains which is the minimum price which the traders must pay to the farmers when they buy the produce from the farmers in the agricultural markets.

Agricultural production being seasonal in nature, a good harvest for one farmer could very well mean the same for all the farmers of the same crop in that region, this leads to excess supply of the output and the problem is aggravated when the market demand does not match up to the given market supply.

The farmer may compel the farmer to withdraw his intended supply of the food grain or agricultural produce, this again would cause shortage of the produce in the market. Hence in order to avoid such a situation the government fixes the floor price or the minimum price for the produce. It acts a s a support price for the farmer and the government buys the excess produce form the farmer which they fail to sell in the open market.

The floor price is usually set at a price higher than the market determined price since at the market determined price the supply is more than the demand and the government , in order to protect the interests of the farmers buys the excess stock at the minimum price .