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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

The government sets a binding price floor above the equilibrium price in a market for an agricultural product. Which outcome follows in the short run?

A surplus arises. A binding price floor set above equilibrium raises quantity supplied and reduces quantity demanded, so supply exceeds demand at that price and the excess remains unsold unless the government buys it.

  1. AA shortage because quantity demanded exceeds quantity supplied
  2. BA surplus because quantity supplied exceeds quantity demandedCorrect
  3. CNo change because markets clear automatically
  4. DA fall in the quantity supplied below the equilibrium quantity
  5. A rightward shift of the demand curve

Explanation

At a price above equilibrium, producers supply more and consumers buy less, so quantity supplied exceeds quantity demanded. This creates a surplus. A shortage arises from a binding price ceiling, not a floor.

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