Question

Price floors typically result in ________.

	a.	excess supply
	b.	quantity supplied equals quantity demanded
	c.	excess demand

Answer 1

1. Excess supply

The Price floor or minimum price fixation is regulation where government keeps the minimum price above the equilibrium price which creates excess supply in the economy it is done due to keep the interest of the farmers which grow crops like sugarcane and wheat so that they get an optimal rate of their crop in the market.

There is excess supply of the commodity because the price is set above the equilibrium level, farmers and labors benefit from this as it increases their income and consumers has to pay a higher price than the equilibrium, it imposes a cost on the government as excess commodity has to be purchased by the government which creates buffer stock while on the other hand government tries to pass on the burden to its consumers via imposing higher taxes.