Question:
The cost to the government of introducing a guaranteed minimum price for a commodity above the free market equilibrium price will be greatest if,
(1) demand and supply are both price elastic.
(2) demand and supply are both price inelastic.
(3) demand is price elastic and supply is price inelastic.
(4) demand is price inelastic and supply is price elastic.
(5) demand and supply both have unitary price elasticity.
Correct Answer:
(1)
Answer Explanation:
An effective minimum price causes a surplus (quantity supplied exceeds quantity demanded), which the government must buy. If both curves are highly elastic, the higher price will cause suppliers to flood the market with goods, and consumers to drastically reduce purchases, creating a massive surplus and a huge bill for the government.
Topic: Price Control Year: 2021
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