A price floor set above the equilibrium price leads to what outcome?

• A. Surplus
• B. Shortage
• C. No effect
• D. Equilibrium price

Answer: (A)

When a price floor is set above the market-clearing price, the higher price keeps the market above the level where buyers and sellers agree on quantity. At this higher price, producers want to supply more while buyers want to buy less, so the quantity supplied exceeds the quantity demanded. This creates a surplus of the good.

For example, if the equilibrium price is 10 and the floor is 12, suppliers may offer more than buyers are willing to purchase at 12, producing extra units that sit unsold. This surplus would persist unless the government buys the excess or implements other measures to reduce supply or raise demand.