Question

Under a production quota policy, the government can maintain a particular support price by reducing the quantity supplied. To maintain a particular support price, how must the quota amount change if the demand curve becomes more elastic?

1) The quota amount depends on the supply curve.
2) The quota amount does not change.
3) The quota amount increases.
4) The quota amount decreases.

Answer 1

If the demand curve becomes more elastic under a production quota policy, the quota amount must decrease to maintain the particular support price.

Step-by-step explanation:

Under a production quota policy, the government can maintain a particular support price by reducing the quantity supplied. If the demand curve becomes more elastic, the quota amount must decrease in order to maintain the particular support price. This is because a more elastic demand means that consumers are more responsive to changes in price, so a decrease in quantity supplied is needed to prevent excess supply and maintain the support price.