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 or service 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, it must be set above the equilibrium price. If it were set below equilibrium, the market price would already be higher, so the floor would not matter (it would be non-binding).

Step 3: Show the solution

• At a price above equilibrium, quantity supplied increases (producers want to sell more).
• At that same higher price, quantity demanded falls (consumers buy less).
• So Qs > Qd, which means there is a surplus (excess supply).

Checking the options:

• A. At equilibrium, there would be no shortage and no effect at all. Wrong.
• B. Above equilibrium does not cause shortage; it causes surplus. Wrong.
• C. Below equilibrium describes a price ceiling, which causes shortage. Wrong.
• D. Above equilibrium and causes surplus. Correct.

Step 4: Answer

Step 5: Exam tip Remember: Floor = Frees up surplus; Ceiling = Causes shortage.

• Price floor → set above equilibrium → surplus
• Price ceiling → set below equilibrium → shortage

Think of a floor as something you stand on top of, so the price sits above the market level.