Some governments support farmers by buying their products at fixed prices. Which of the following explain how that could result in the government accumulating large stocks of agricultural products?

Question

Quizplus · Accepted Answer

A) The fixed price exceeds the market equilibrium: When a government sets a fixed price for agricultural products that is above the market equilibrium price, it encourages farmers to produce more since they are guaranteed a higher price for their products than what the market would normally pay. This can lead to overproduction.
B) Quantity supplied exceeds quantity demanded: As a result of the fixed price being higher than the market equilibrium, the quantity of agricultural products supplied by farmers can exceed the quantity demanded by consumers at that price. Since the government is committed to buying the surplus at the fixed price, it ends up accumulating large stocks of the products.
C) The market is subject to excess demand: This statement is not correct in the context of the government setting a fixed price above market equilibrium. Excess demand would occur if the price were set below the market equilibrium, leading to a shortage rather than a surplus. In the scenario described, the government's intervention causes a surplus, not a shortage.
Therefore, the combination of a fixed price above market equilibrium (A) and the resulting excess supply over demand (B) explains why the government could end up accumulating large stocks of agricultural products.

Some Governments Support Farmers by Buying Their Products at Fixed