Question

Suppose the equilibrium price of milk is $3 per gallon but the federal government sets the market price at $4 per gallon. The market mechanism will force the milk price back down to $3 per gallon unless the government:

Answer 1

Answer: Buys the excess supply of milk.

Step-by-step explanation:

Given that,

Equilibrium price of milk = $3 per gallon

Federal government sets the market price = $4 per gallon

The government have to buy excess supply of milk and remove it from the market if Fed wants to keep the price of milk at $4 per gallon. Once the excess supply of milk extracted from the market then as a result equilibrium price of milk rises to $4 per gallon.