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.

The market determined price of a good is Rs. 40. The government fixes the minimum price of the good as Rs. 50. Calculate the excess demand/excess supply it will cause if the demand and supply functions are Qd = 200 - p and Qs = 120 + p respectively.

Excess supply of 20 units.

The correct answer is Option (2) → Excess supply of 20 units.

Given:

• Market price (equilibrium) = Rs. 40

• Government fixed minimum price (floor price) = Rs. 50

• Demand function: Qd=200−p

• Supply function: Qs=120+p

Quantity demanded and supplied at the floor price (Rs. 50)

Qd ​= 200−50 = 150

Qs​ = 120+50 = 170

Excess Supply = Qs​−Qd = 170 - 150 = 20​