Question

Suppose the price of wheat is set at $5 a bushel and not allowed to decrease. This price is above the equilibrium price, which causes a surplus of wheat in the marketplace. This situation describes a _____.
price floor

price ceiling

Answer 1

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Answer 2

The correct answer is: "price floor".

Establishing a price floor is a policy that consists on setting a threshold so that the price of a certain product or service cannot be decrease under that. It distorts the market outcome when it is larger the equilibrium price, because the amount supplied (in this case by wheat producers) at the price floor level would the larger than the amount demanded by consumers and, hence, there is an excess of supply.