Question

Question 1 (24 marks) (a) Assume that the markets for sugar cane, rum and whiskey are initially in equilibrium. Sugar cane is a principal ingredient in rum, but it is not an ingredient in whiskey. Rum and whiskey are substitutes in consumption. The government implements a price restriction in the sugar cane market with the aim of protecting the farmers. (i) What type of price restriction is implemented by the government

Answer 1

(i) The type of price restriction implemented by the government is likely a **price floor.** A price floor is a government-imposed minimum price set above the equilibrium price. The intention is to ensure that the market price does not fall below a certain level, providing support to producers, in this case, the sugar cane farmers.