Suppose a binding price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia?

The correct answer is letter "A": Quantity demanded will decrease, quantity supplied will increase, and a surplus will result.

Explanation:

Price floors are limits the government sets so prices for certain goods or services cannot be lowered than a given amount. They are established to protect the income of providers. The most common example of a price floor is the labor minimum wage.

In the example, setting a price floor on sparkling wine represents wine will not be cheaper than a set price. Low-income individuals who will not be able to afford the price at its new level will stop purchasing wine which decreases the quantity demanded. On the other hand, wine producers will be encouraged to bottle more wine in an attempt to increase their profits, increasing the quantity supplied.

Eventually, the increasing quantity supplied but decreasing quantity demand will generate a surplus.