Price floor is defined as

• A. A maximum price set by government below the equilibrium
• B. A maximum price set by government above the equilibrium
• C. A minimum price set by government below the equilibrium
• D. A minimum price set by government above the equilibrium

Answer: (D)

Price floor is a government-imposed minimum price for a good or service. When this minimum is set above the market’s equilibrium price, it binds the market: producers want to supply more at the higher price, but buyers want to purchase less, creating a surplus. If the floor is below the equilibrium, it has little or no effect because the market price would settle at or above the floor anyway. This is why the correct description is a minimum price set by government above the equilibrium, such as a minimum wage, which can lead to excess supply in the relevant market.