Refer to Figure 29.2 for Farmer Smith with a price floor set above the market price.Assume the price support is located at the minimum point on the farmer's ATC curve.If this support is eliminated, all of the following will result except
A) Some farmers will leave the industry.
B) Farmers will begin to lose money as the price returns to equilibrium.
C) Fewer resources will be allocated to this market.
D) The rate of return on invested capital will increase.

Question

Refer to Figure 29.2 for Farmer Smith with a price floor set above the market price.Assume the price support is located at the minimum point on the farmer's ATC curve.If this support is eliminated, all of the following will result except
A) Some farmers will leave the industry. 
B) Farmers will begin to lose money as the price returns to equilibrium. 
C) Fewer resources will be allocated to this market. 
D) The rate of return on invested capital will increase.

Quizplus · Accepted Answer

Eliminating the price support will result in a decrease in the price of the good, which will lead to lower profits for farmers and some may choose to leave the industry (option A). The decrease in profits will also lead to fewer resources being allocated to the market (option C). However, eliminating the price support will not lead to an increase in the rate of return on invested capital (option D) as the price of the good is decreasing and profits are decreasing. Option B is also incorrect as farmers were already making a profit at the market price before the price support was introduced, and they will return to making profits at the market price after the support is eliminated.