Q12 of 30 Page 1

Define Price Floor. What is the common purpose of fixation of floor price by the

government? Explain any one likely consequence of this nature of intervention by the


government.


OR


Define Price Ceiling. What is the common purpose for the price ceiling imposed by the


government? Explain any one likely consequence of this nature of intervention by the


government in the price determination process. (2+2+2)

Price floor is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply.

Governments help farmers by setting price floors in agricultural markets. A minimum allowable price set above the equilibrium price is a price floor. With a price floor, the government prohibits a price below the minimum. A price floor that is set above the equilibrium price creates a surplus.


Floor pricing is supported with support price policy. Government purchases surplus products from farmers if they are unable to sell their products in the market.


OR


Price ceiling is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply.


The government imposes price ceiling to control the maximum prices that can be charged by suppliers for the commodity. This is done to make the commodities affordable to the general public. However, long term application of a price ceiling can lead to black marketing and unrest in the supply side.



More from this chapter

All 30 →
10

Identify which of the following is not true for the Indifference Curves. Give valid reasons

for the choice of your answer:


a. Lower indifference curve represents a lower level of satisfaction.


b. Two regular convex to origin indifference curves can intersect each other.


c. Indifference curve must be convex to the origin at the point of tangency with the budget


line at the consumer’s equilibrium.


d. Indifference curves are drawn under the ordinal approach to consumer equilibrium.


OR


A consumer has total money income of 250 to be spent on two goods X and Y with prices


of 25 and 10 per unit respectively. On the basis of the information given, answer the


following questions:


a. Give the equation of the budget line for the consumer.


b. What is the value of the slope of the budget line?


c. How many units can the consumer buy if he is to spend all his money income on good X?


d. How does the budget line change if there is a fall in the price of good Y?

 11

Explain the concept of marginal opportunity cost using a numerical example

 13

a) Apply the geometric method to determine the elasticity of supply at point L on the supply


curve SS given above. (3)


b) Justify the statement, ‘In economics, normal profits are always a part of total cost’. (3)

 14

A consumer, Mr. Aman is in the state of equilibrium consuming two goods X and Y, with given

prices Px and Py. Explain what will happen if:


a. MUx / Px is greater than MUy / Py.


b. Py falls