Study the diagram given below and answer the questions that Y follow:(

1.	Study the diagram given below and answer the questions that Y follow:(i) Pe is the equilibrium price. What would prompt the government to fix the price at P1? (ii) What would be the effect of fixing the price at P1?
Answer» (i) P1 is the price floor. Price floor refers to the minimum price (above the equilibrium price) fixed by the government, which the producer must be paid for their produce. When the government feels that the price fixed by the forces of demand and supply is not remunerative from the producer ‘s point of view, then it fixes a price (known as price floor) which is more than the equilibrium price. Most well-known examples of imposition of price floor are agricultural price support programmes and minimum wage legislation. (ii) This will lead to a situation of excess supply.

Study the diagram given below and answer the questions that Y follow:(i) Pe is the equilibrium price. What would prompt the government to fix the price at P1? (ii) What would be the effect of fixing the price at P1?

Answer»

(i) P1 is the price floor. Price floor refers to the minimum price (above the equilibrium price)

fixed by the government, which the producer must be paid for their produce. When the government feels that the price fixed by the forces of demand and supply is not remunerative from the producer ‘s point of view, then it fixes a price (known as price floor) which is more than the equilibrium price.

Most well-known examples of imposition of price floor are agricultural price support programmes and minimum wage legislation.

(ii) This will lead to a situation of excess supply.

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