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CA Foundation · Business Economics · Theory of Demand and Supply

A government imposes a price floor of ₹100 per liter on milk, set above the current equilibrium price of ₹80 per liter. Assuming supply and demand curves remain unchanged, which outcome is most likely in the short term?

A price floor above equilibrium creates a surplus because producers supply more at the higher mandated price while consumers demand less. The quantity supplied exceeds quantity demanded at ₹100, resulting in unsold milk inventory that the government may need to purchase or manage.

  1. AA shortage of milk as consumers demand less and producers supply more
  2. BA surplus of milk as producers supply more than consumers demandCorrect
  3. CThe equilibrium price adjusts to ₹100, eliminating any imbalance
  4. DConsumer welfare improves because they receive cheaper milk from government subsidies

Explanation

A price floor above equilibrium prevents the price from falling to equilibrium. At ₹100, the quantity supplied exceeds quantity demanded (movements along unchanged curves). This creates a surplus, not a shortage. The government must absorb unsold milk or manage disposal. Option A reverses cause and effect—surpluses occur when prices are held above equilibrium, not below. Option C ignores that price floors prevent free market adjustment.

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