Question

If a price floor above the equilibrium price is imposed by government in a market:

	A.	Shortages of the commodity will develop
	B.	The quantity demanded will exceed the quantity supplied
	C.	The quantity supplied will exceed the quantity demanded
	D.	The free-market equilibrium price and quantity will still be realized

Answer 1

Ans -(C) The quantity supplied will exceed quantity demand

Price floor helps to prevent a price from reducing below a fixed level. If price floor is fixed over the equilibrium price , it results in quantity supply in excess to quantity demand and finally there will be surplus supply.

A) No, shortage of commodity will not develop in this case. Piece ceiling restricts the price to rise to the level of equilibrium. As prices are not as high , so firms would supply shorter than demand , so it will cause shortage.

B)No, quantity demand will not exceed quantity supplied in case of floor price above equilibrium price , rather it will cause quantity supply to be in excess of quantity demand.

D) No, free market equilibrium price and quantity will not be realised because if price floor is fixed over the equilibrium price , consumers will see that now they have to pay more for the same product and they make shift to the substitute product or stop using it. Suppliers will see that they will get increased price for their goods so they will increase their production. It will result in surplus supply so equilibrium is not possible because equilibrium occurs when demand and supply are equal.