Question:
Assume that the market demand curve for eggs is $Q_{D}=140-2P$ and the market supply curve of eggs is $Q_{S}=-10+P.$ Suppose the government decides to have a deficiency payment scheme with a guaranteed price floor set at Rs. 52 per egg. What is the cost of this programme to the government? (quantity is in million units)
(1) Rs. 312 million
(2) Rs. 126 million
(3) Rs. 84 million
(4) Rs. 80 million
(5) Rs. 6 million
Correct Answer:
(2)
Answer Explanation:
At the guaranteed price of 52, suppliers produce $Q_{S} = -10 + 52 = 42$ million. To sell all 42 million, the consumer price must fall to where $Q_{D} = 42 rightarrow 42 = 140 – 2P rightarrow P = 49$. The government pays the difference (52 – 49 = Rs. 3) per unit. Total cost = 3 * 42 million = Rs. 126 million.
Topic: Price Control Year: 2023
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