Question

Price floors and price supports set a minimum price below which a good or service cannot be sold. Minimum wage laws and agricultural price supports are common examples of such price controls.
When price floors are used to keep prices above free-market levels in the agricultural industry, which of the following outcomes are common? Check all that apply.
A. Overinvestment in the agricultural industry
B. A decrease in the future supply of agricultural goods
C. A surplus of agricultural goods
D. A problem of disposal of surplus agricultural goods

Answer 1

The price floor is a minimum price limit generally set up by the government. The market price cannot go beyond this limit. Price floor is applied to prevent price of goods and services from falling below a certain limit. The most common examples for price floors is minimum wage laws and agricultural support prices. In case price floor is set above the equilibrium price level it has a number of adverse effects. Artificially high price encourages over-investment in the industry. At high prices more is supplied by the producers but the consumers prefer to purchase lesser at higher prices. This would consequently lead to a surplus as the quantity supplied is greater than the quantity demanded. Then this excess quantity supplied needs to be disposed off. So, a disposal problem arises.

Thus, we can say that the correct answer are options A, C and D.