Suppose the equilibrium price of milk is $3 per gallon but the federal government sets the market price at $4 per gallon. The market mechanism will force the milk price back down to $3 per gallon unless the government:
A) rations the excess demand for milk among consumers.
B) buys the excess supply of milk and removes it from the market.
C) Both A and B are plausible actions.
D) The government cannot maintain the price above the equilibrium level.

Question

Quizplus · Accepted Answer

The market mechanism will create an excess supply of milk as producers will be incentivized to produce more milk than consumers are willing to buy at $4/gallon. The government would need to step in and buy the excess supply of milk and remove it from the market to maintain the price at $4/gallon. Rationing demand among consumers (option A) would not be necessary as there would not be excess demand at the higher price. Option D is also true, but it does not provide a specific action for the government to take to maintain the price above the equilibrium level.

Suppose the Equilibrium Price of Milk Is $3 Per Gallon