The government sets a price floor of ₹25 on shirts, while the market equilibrium price is ₹20. What will happen to the quantity supplied and the quantity demanded of shirts?
Answer
Quantity supplied will increase and quantity demanded will decrease, causing a surplus.
The correct answer is Quantity supplied will increase and quantity demanded will decrease, causing a surplus. — Thus, quantity supplied > quantity demanded, leading to an excess supply (surplus).
Step-by-step solution
- A price floor of ₹25 is above the equilibrium price of ₹20, so the market price is fixed at ₹25.
- At this higher price, producers are willing to supply more shirts because their revenue per shirt is higher.
- At the same time, consumers are willing to buy fewer shirts because the price is higher.
- Thus, quantity supplied > quantity demanded, leading to an excess supply (surplus).
Common mistake: Assuming quantity demanded increases instead of decreasing
Concept tested: Effect of price floor on supply and demand
Published · How this solution was prepared and checked
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