In a crop market with a price support above the equilibrium price, the total amount of the subsidy paid to farmers is equal to the
A) quantity of the crop produced multiplied by the support price.
B) quantity of the surplus crop multiplied by the equilibrium price.
C) quantity of the surplus crop multiplied by the support price.
D) quantity of the crop purchased by domestic users multiplied by the equilibrium price.
E) quantity of the crop purchased by domestic users multiplied by the support price.

Question

Quizplus · Accepted Answer

The subsidy paid to farmers is equal to the difference between the support price and the equilibrium price multiplied by the quantity of the crop produced. This is because the support price creates a surplus of the crop, which the government purchases from the farmers at the support price. The quantity of the surplus crop is equal to the total quantity produced minus the quantity demanded at the support price (which is lower than the equilibrium price). Multiplying this quantity by the support price gives the total amount of the subsidy paid to farmers.

In a Crop Market with a Price Support Above the Equilibrium