Question

The government of country X found that farmers earn little profit by selling wheat to wholesalers at the market price of $5.50 per bushel. To help farmers, the government decides to _________ the price of wheat.

A) Increase
B) Decrease
C) Maintain

Answer 1

The government of country X decides to increase the price of wheat to help farmers receive a higher income, resulting in a quantity supplied that exceeds the market demand and creating a surplus.

Step-by-step explanation:

To assist the farmers who are earning little profit by selling wheat at the market price of $5.50 per bushel, the government of country X decides to increase the price of wheat. This intervention is intended to ensure that farmers receive a higher income for their wheat crops. According to the economic principle demonstrated in Figure 3.22, when the government sets a price floor above the equilibrium price, it maintains a price that is higher than the market would naturally set (price Pf). The outcome of such a policy is an increase in the quantity of wheat supplied by the farmers (Qs), which exceeds the quantity demanded (Qd) at the higher price, leading to a surplus of wheat in the market.