The question requires us to determine the cost of the
Explanation of Solution
At the
In the given graph, point E represents the equilibrium point for the corn in the
Equilibrium price = $3 per bushel
Equilibrium quantity = 1000 units.
At a price floor of $5 per bushel,
Quantity supplied = 1200 units
Quantity demanded = 800 units.
If the quantity supplied is more than the quantity demanded then the market will face a surplus of the product.
Surplus = Quantity supplied − Quantity demanded
Surplus = 1200 − 800 = 400 units.
Thus, at the price floor of $5 per bushel, 400 bushels of corn represents the surplus amount of corn.
The cost of surplus corn borne by the government = amount of surplus × price floor
Cost of surplus = 400 bushels × $5 per bushel = $2,000
To maintain the price floor, the cost of surplus corn will be $2000.
Option “b” is correct.
Chapter 2R Solutions
Krugman's Economics For The Ap® Course
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