Study the below graph which shows price floor set by government. Excess supply is denoted by?
Answer & explanation
Correct answer: option 3
The correct answer is option 3: qf to qf’
The above figure shows the market supply and the market demand curve for a commodity on which price floor is imposed. The market equilibrium here would occur at price p* and quantity q*. 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.
