Question

Assume that the market equilibrium price is 50 cents for a pound of bananas, and the quantity sold is roughly 10 pounds. What kind of price control could generate an excess supply of bananas? Select the correct answer below: A price floor of 25 cents per pound A price floor of 50 cents per pound A price floor of 75 cents per pound None of the above

Answer 1

Answer:

A price floor of 75 cents per pound

Explanation:

Price floor is the legal minimum price set by the government as a price control mechanism of which can be paid for a good, service or labor. It means, the price  of a particular good or service cannot fall below the stipulated price given.  

In the case where a floor price is set above the equilibrium price (i.e. the price set is higher than the equilibrium price), the quantity supplied would surpass the quantity demanded, which would result in surplus of the goods. Supply exceeds demand.

• If market equilibrium price is 50 cents per pound of banana, and quantity supplied is 10 pounds, setting a price floor of 75 cents per pound (higher than equilibrium price of 50 cents), would result in excess supply. Meaning, more supply of bananas while quantity demanded falls, causing  surplus of banana.