Read the passage carefully and answer the questions based on the passage:
FLOOR PRICES
For certain goods and services, fall in price below a particular level is not desirable and hence the government sets floors or minimum prices for these goods and services. The government imposed lower limit on the price that may be charged for a particular good or service is called price floor. Most well-known examples of imposition of price floor are agricultural price support programmes and the minimum wage legislation. Through an agricultural price support programme, the government imposes a lower limit on the purchase price for some of the agricultural goods. Similarly, through the minimum wage legislation, the government ensures that the wage rate of the labourers does not fall below a particular level.
To be effective, the floor price should be determined
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → More than the market determined price.
A floor price is a minimum legal price set by the government.
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For it to have any effect, it must be above the equilibrium (market-determined) price — otherwise, the market will continue to operate normally at equilibrium.
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When the floor price is higher than the equilibrium price, sellers want to sell more, but buyers demand less, leading to excess supply — which is the typical impact of a price floor.