Question

Suppose the government decides to create a price support (floor) on the price of corn, which of the following is a true statement?

a) A binding price support/floor will tend to lower the price of corn for poorer people.
b) If the government does not buy any wheat, there will tend to be an excess supply of wheat in the marketplace, if the price floor is binding.
c) A non-binding price support/floor below the equilibrium price in the market will also lead to a rise in the price of corn.
d) It is likely that the total surplus (consumer surplus plus producer surplus) will rise with a price support program.

Answer 1

b) If the government does not buy any wheat, there will tend to be an excess supply of wheat in the marketplace, if the price floor is binding.

Step-by-step explanation:

Price support scheme is a government's policy to ensure that that the farmers earn profit on their commodities and keep producing. It main purpose is the encourage investment and production. To achieve this governments establish minimum price and purchases crops at that price.

It is an important component of government to promote agriculture. It is also beneficial for the consumers as it doesn't allows the price to rise above a certain level and leads to lower prices for the consumers. If the government stops buying the wheat then there will be excess supply because no one will be able to buy the wheat at lesser price.