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Then assume the government imposes a price floor of p2. How does this affect the market?


Consider the market for soybeans illustrated in the figure below. Assume the market is initially in equilibrium at point A. Then assume the government imposes a price floor of p2. How does this affect the market?

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The price floor results in an equilibrium where supply equals demand. 

The price floor results in a surplus of corn. 

The price floor is not binding and has no effect 

The price floor results in a shortage of corn

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Answer #1

The correct answer is (b) the price floor will result in surplus of corns

Initially Market is in equilibrium at Point A and Hence, Equilibrium Price = p1. Now Suppose government Impose a Price Floor at p2 i.e. Minimum Price possible in the Market is p2. As p2 > p1, Hence Price floor is binding and market will not reach its equilibrium. At p2 Quantity demand QD and Quantity supplied = QS. Surplus occurs in the market when Quantity supplied > Quantity demand and Shortage occurs in the market when Quantity supplied < Quantity demand. Here QS > QD, HenceThere will be surplus of corns.

Hence the correct answer is (b) the price floor will result in surplus of corns

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