If the federal government sets a minimum price for wheat at $5.00 per bushel when the equilibrium price is $4.50, then
A) a surplus will be created causing the price to fall to the equilibrium price of $4.50.
B) a permanent surplus will develop because the government established the minimum price at $5.00.
C) a shortage will be created causing the price to rise to the equilibrium price of $4.50.
D) a permanent shortage will develop because the government established the minimum price at $5.00.

Question

Quizplus · Accepted Answer

If the government sets a minimum price above the equilibrium price, it creates a surplus because producers will be incentivized to produce more at the higher price. However, consumers will be less incentivized to buy at the higher price, causing excess supply. Since the government is setting a floor at $5.00 per bushel, this creates a permanent surplus because producers will continue to supply more wheat at the higher price, while consumers will not buy as much at the higher price. Therefore, the excess supply will continue to build up and create a surplus.

If the Federal Government Sets a Minimum Price for Wheat