The question requires us to determine the cost of the
Explanation of Solution
At the equilibrium price, the quantity demanded equals the quantity supplied means there is no shortage or surplus of the product at this point.
In the given graph, point E represents the equilibrium point for the corn in the
Equilibrium price = $3 per bushel
At a price floor of $5 per bushel,
Quantity supplied = 1200 units
Quantity demanded = 800 units.
If the quantity supplied is more than the quantity demanded then the market will face a surplus of the product.
Surplus = Quantity supplied − Quantity demanded
Surplus = 1200 − 800 = 400 units.
Thus, at the price floor of $5 per bushel, 400 bushels of corn represents the surplus amount of corn.
The cost of surplus corn borne by the government = amount of surplus × price floor
Cost of surplus = 400 bushels × $5 per bushel = $2,000
To maintain the price floor, the cost of surplus corn will be $2000.
Option “b” is correct.
Chapter 2R Solutions
Krugman's Economics For The Ap® Course
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