Suppose the demand function for wheat is and supply function is . The government is concerned that the market equilibrium price of wheat is too low and would like to implement a price support policy to protect the farmers. By implementing the price support policy, the government sets a support price and purchases the extra supply at the support price.
For the problem in Q1, the cost to the government of this policy is
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Suppose the demand function for wheat is Q_d = 10 - 2p and supply function is Qₛ = 3p - 5. The government is concerned that the market equilibrium price of wheat is too low and would like to implement a price support policy to protect the farmers. By implementing the price support policy, the government sets a support price pₛ = 4 and purchases the extra supply at the support price. For the problem in Q1, the cost to the government of this policy is (A) 21 (B) 20 (C) 14 (D) 10
Also written as: Suppose the demand function for wheat is Q_d = 10 - 2p and supply function is Q_s = 3p - 5. The government is concerned that the market equilibrium price of wheat is too low and would like to implement a price support policy to protect the farmers. By implementing the price support policy, the government sets a support price p_s = 4 and purchases the extra supply at the support price. For the problem in Q1, the cost to the government of this policy is
Perfect competition has come up 115 times in 7 exams since 2006.
This question is on Price ceilings, floors and subsidies, part of Perfect competition in Microeconomics.
What binding and non-binding price controls and per-unit subsidies do to quantity, shortage and cost.
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Question from the JNU SIS 2012 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.