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CSEET · Economic and Business Environment · Basics of Demand and Supply and Forms of Market Competition

A government fixes a minimum support price for a crop above the market equilibrium price and does not buy any of the output. In the market for that crop, the likely result is:

A surplus results. When a price floor is set above equilibrium and is binding, the quantity supplied exceeds the quantity demanded at that price. Unless the government buys the excess, the unsold output remains. A shortage arises only with a ceiling set below equilibrium.

  1. AA surplus, as quantity supplied exceeds quantity demanded at the fixed priceCorrect
  2. BA shortage, as quantity demanded exceeds quantity supplied
  3. CNo change, as the equilibrium price continues to apply
  4. DA rightward shift of the demand curve

Explanation

A binding price floor set above equilibrium raises the price. At that price, farmers want to supply more while buyers want to purchase less, giving excess supply. A shortage would arise from a binding price ceiling set below equilibrium, which is the key distractor.

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