A price floor is usually fixed

1. Analyze the question The question asks where a price floor is usually set relative to the equilibrium price, and what effect it has on the market.

2. Explain the concept A price floor is a legally set minimum price. Sellers cannot charge less than this price. Common examples are minimum wage and guaranteed minimum prices for agricultural produce (for example, cocoa or grains).

• For a price floor to have any effect, it must be set above the equilibrium price. A floor set below equilibrium is not binding, because the market price already sits higher.
• When the price is held above equilibrium: • Quantity supplied rises, because producers want to sell more at the higher price. • Quantity demanded falls, because consumers buy less at the higher price. • So quantity supplied > quantity demanded, which creates a surplus (excess supply).

3. Step-by-step solution

• Option B: a floor below equilibrium is not binding and causes no surplus, so it is wrong.
• Option C: a floor above equilibrium causes a surplus, not a shortage. Shortages come from price ceilings (maximum prices) set below equilibrium, so it is wrong.
• Option D: a floor at equilibrium changes nothing, but that is not what a price floor is "usually" set to do, so it is wrong.
• Option A: above equilibrium and causes surpluses. This is correct.

4. Answer A. above the equilibrium and causes surpluses

5. Exam tip Remember: Floor = Fixed above = Flood of goods (surplus). Ceiling = Cap below = Cut in supply (shortage). Always ask: "Is the price pushed above or below equilibrium?" Above means surplus, and below means shortage.