With reference to "Price Floor", consider the following statements: 1. It is a government-imposed lower limit on the price of a good or service. 2. Minimum Wage Legislation is an example of a price floor. 3. Imposition of a price floor usually results in excess demand in the market. Which of the statements given above is/are correct?

The correct option is 1 and 2 only. Explanation Government intervention in market mechanisms often takes the form of price controls. A Price Floor is a regulatory measure where the government sets a minimum legal price for a good or service, preventing the market price from falling below a certain level. To be effective, it must be set above the equilibrium price. Statement-wise Analysis: - Statement 1 is Correct: A price floor is defined as a government-imposed lower limit on the price of a specific good or service. It ensures that sellers receive a minimum remuneration for their product or service. - Statement 2 is Correct: Minimum Wage Legislation is a classic example of a price floor in the labor market. The government sets a minimum wage rate (price of labor) that employers must pay, which is typically set above the equilibrium wage rate to ensure a basic standard of living for workers. - Statement 3 is Incorrect: When a price floor is set above the equilibrium price, the quantity supplied by producers increases (due to the incentive of higher prices), while the quantity demanded by consumers decreases. This results in excess supply (a surplus) in the market, not excess demand. Excess demand is typically a consequence of a Price Ceiling (maximum price limit set below equilibrium). Key Takeaway: A Price Floor (e.g., MSP, Minimum Wage) creates a market surplus (excess supply), whereas a Price Ceiling (e.g., rent control) creates a market shortage (excess demand).

With reference to "Price Floor",… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 2: Market Equilibrium

mcqmedium

With reference to "Price Floor", consider the following statements:

It is a government-imposed lower limit on the price of a good or service.
Minimum Wage Legislation is an example of a price floor.
Imposition of a price floor usually results in excess demand in the market.

Which of the statements given above is/are correct?

NCERT textbook question

From NCERT Introductory Microeconomics · Page 85

Options

A1, 2 and 3
B2 only
C1 and 3 only
D1 and 2 only

Did you get this right?

Solution

The correct option is 1 and 2 only.

Explanation

Government intervention in market mechanisms often takes the form of price controls. A Price Floor is a regulatory measure where the government sets a minimum legal price for a good or service, preventing the market price from falling below a certain level. To be effective, it must be set above the equilibrium price.

Statement-wise Analysis:

Statement 1 is Correct: A price floor is defined as a government-imposed lower limit on the price of a specific good or service. It ensures that sellers receive a minimum remuneration for their product or service.
Statement 2 is Correct: Minimum Wage Legislation is a classic example of a price floor in the labor market. The government sets a minimum wage rate (price of labor) that employers must pay, which is typically set above the equilibrium wage rate to ensure a basic standard of living for workers.
Statement 3 is Incorrect: When a price floor is set above the equilibrium price, the quantity supplied by producers increases (due to the incentive of higher prices), while the quantity demanded by consumers decreases. This results in excess supply (a surplus) in the market, not excess demand. Excess demand is typically a consequence of a Price Ceiling (maximum price limit set below equilibrium).

Key Takeaway:

A Price Floor (e.g., MSP, Minimum Wage) creates a market surplus (excess supply), whereas a Price Ceiling (e.g., rent control) creates a market shortage (excess demand).

Your note

More from Chapter 2: Market Equilibrium

In the context of market equilibrium, what happens when the market demand curve shifts rightward while the supply curve remains unchanged ?

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In a market with free entry and exit, if the demand curve shifts to the left: Statements: 1. Firms will enter the market to capture the lower price. 2. The market price will temporarily fall below the minimum average cost. 3. The supply will increase until the price returns to the minimum average cost. Which of the statements given above is/are correct?

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What is the primary consequence of a price ceiling accompanied by rationing?

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With reference to the supply of labour by an individual, consider the following statements: 1. An increase in wage rate always leads to an increase in the supply of labour hours by an individual. 2. At high wage rates, the income effect may dominate the substitution effect, leading to a decrease in labour supply. 3. The individual labour supply curve can be backward bending. Which of the statements given above is/are correct?

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In a perfectly competitive market, if the market price is above the equilibrium price, there will be:

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