Question:
Suppose that the government wants to introduce an effective minimum price to support corn farmers. What should the government do to maintain an effective minimum price of $OP_2$?
(1) Buy quantity $Q_1 – Q_2$
(2) Buy quantity $0 – Q_2$
(3) Buy quantity $Q_1 – Q_3$
(4) Buy quantity $Q_2 – Q_3$
(5) Sell quantity $Q_1 – Q_2$
Correct Answer:
(3)
Answer Explanation:
An effective minimum price (price floor) is set above equilibrium, causing quantity supplied ($Q_3$) to exceed quantity demanded ($Q_1$). To maintain this price and prevent the surplus from crashing the market, the government must purchase the excess supply, which is the distance between $Q_1$ and $Q_3$.
Topic: Price Control Year: 2022
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