In the market for cotton, suppose the equilibrium price is $10 per tonne and the equilibrium quantity is 100 tonnes. If the government then imposes a price support of $20 per tonne,

Question

Quizplus · Accepted Answer

When the government imposes a price support of $20 per tonne, the market price increases as it is now above the equilibrium price. Therefore, the new market price will be $20 per tonne. As a result, the quantity demanded will decrease (law of demand), and quantity supplied will increase (law of supply). This will lead to a surplus of cotton in the market. Therefore, the correct answer is (E) the market price increases.

In the Market for Cotton, Suppose the Equilibrium Price Is