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Suppose the market price of corn is $5 a bushel but the government sets a price of $7
Suppose the market price of corn is $5 a bushel but the government sets a price of $7. As a result:
A. farmers will reduce planting until the market price is $7
B. there is a shortage of corn
C. the private demand will increase over time until $7 is the market price
D. the government must purchase the surplus to maintain the price
Expert Solution
Answer: D
When the government sets a price above the market price, it creates a surplus which it must purchase to maintain the $7 price. Otherwise sellers will lower the prices to sell their production. This will cause the price to fall. The only way to keep the price above equilibrium is for government to make it illegal for transactions to take place below this or for government to buy the surplus..
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