Suppose the equilibrium price of cotton is $100 per tonne. A price support set at ________ than $100 per tonne ________.

Question

Quizplus · Accepted Answer

A price support set at more than $100 per tonne creates a surplus in the market. This means that there is a quantity of cotton that is supplied in excess of the quantity demanded at the price support level. As a result, the government will be required to purchase the surplus amount of cotton, which would lead to an increase in government spending. This surplus acquisition by the government will likely lead to a decrease in consumer surplus as the surplus cotton will be purchased by the government at a price higher than the equilibrium price, but it could also potentially increase producer surplus. The price support also discourages producers from innovating as they have guaranteed prices regardless of their effort.

Suppose the Equilibrium Price of Cotton Is $100 Per Tonne