In a market, demand is q = 300 - 2p and supply is q = 3p - 200. The government fixes a price floor of Rs 90. Later, demand falls to q = 240 - 2p, while supply and the floor stay the same.
A. Before demand falls, the floor has no effect on the market price.
B. After demand falls, there is an excess supply of 10 units at the floor price.
C. After demand falls, consumers buy 60 units.
D. After demand falls, the government has to buy 70 units to keep the price at Rs 90.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → A, B and C only
A price floor matters only when it is above the equilibrium price. Then firms supply more than consumers buy, and the government buys the surplus to hold the price.
Equilibrium before demand falls:
\( 300 - 2p = 3p - 200 \)
\( 5p = 500 \)
\( p = 100 \)
Equilibrium after demand falls:
\( 240 - 2p = 3p - 200 \)
\( 5p = 440 \)
\( p = 88 \)
A. Before demand falls, the floor has no effect on the market price. — Correct. The floor of Rs 90 is below the equilibrium price of Rs 100, so the market price stays at Rs 100.
B. After demand falls, there is an excess supply of 10 units at the floor price. — Correct. Now the floor is above Rs 88. At Rs 90, supply = 70 and demand = 60, so the surplus is 10.
C. After demand falls, consumers buy 60 units. — Correct. Demand at Rs 90 is 240 − 180 = 60.
D. After demand falls, the government has to buy 70 units to keep the price at Rs 90. — Incorrect. The government buys only the surplus of 10 units. 70 is the whole quantity supplied.
NCERT (2026-27): “5.2.2 Price Floor … But when the government imposes a floor higher than the equilibrium price at pf , the market demand is qf whereas the firms want to supply q′f, thereby leading to an excess supply in the market equal to qf q′f . In the case of agricultural support, to prevent price from falling because of excess supply, government needs to buy the surplus at the predetermined price.” “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. …” |