A price floor is usually fixed

Step 1: Analyze the question The question asks where a price floor is usually set and what effect it has on the market.

Step 2: Explain the concept A price floor is a government-imposed minimum price below which a good cannot legally be sold. Examples include minimum wage and guaranteed minimum prices for agricultural produce (such as cocoa or grains).

• For a price floor to have any effect (to be "binding"), it must be set above the equilibrium price.
• If it were set at or below equilibrium, it would have no effect, because the market price would already be at or above the floor.

Step 3: Work through the effects When the price is held above equilibrium:

• Quantity supplied increases, because producers are attracted by the higher price.
• Quantity demanded decreases, because consumers buy less at the higher price.
• So Qs > Qd, which means there is excess supply (a surplus).

Step 4: Check each option

• A. At equilibrium with no shortage: wrong, because a floor at equilibrium has no effect.
• B. Above equilibrium with shortage: wrong, because the effect is a surplus. A shortage comes from a price ceiling set below equilibrium.
• C. Below equilibrium with surpluses: wrong, because a floor below equilibrium is not binding, and a price below equilibrium creates shortages, not surpluses.
• D. Above equilibrium with surpluses: correct.

Answer: D

Exam tip: Remember "Floor = Floods of goods (surplus), set above equilibrium." And "Ceiling = Cut price, Crowds of buyers (shortage), set below equilibrium."