Answer to Question #130784 in Microeconomics for Mcedisi

Question

Q.1.1 Which of the following results from an effective price floor? (2) (1) Equilibrium  (2) Producer surplus  (3) Excess supply  (4) Excess demand 

Answer 1

Price floors

Price floor is a fiscal policy used by the government to prevent prices from being too low. It is usually set above the equilibrium price to prevent prices from falling below the equilibrium price.

An effective price floor will lead to Excess supply. Price floor will lead to higher prices which lowers the demand of the products but since the prices are high, the suppliers will supply more as per the law of supply. This more supply and less demand will lead to excess supply in the market.