Question

If the equilibrium price of corn is \(\$ 3\) a bushel, and the government imposes a floor of \(\$ 4\) a bushel, the price of corn will (LO6) a) increase to \(\$ 4\) b) remain at \(\$ 3\) c) rise to about \(\$ 3.50\) d) be impossible to determine

Short answer

Since the price floor (\(4) is higher than the current equilibrium price (\)3), producers are not allowed to sell corn for less than $4 a bushel. Therefore, the price of corn will increase to meet the price floor at \(4 a bushel. The correct answer is (a) increase to \)4.

Step-by-step solution

Definition of Price Floor

A price floor is a government-imposed minimum price that must be charged for a good or service. If the equilibrium price is below the price floor, the price floor becomes the new market price.

Identify the current equilibrium price

The problem states that the equilibrium price of corn is $3 a bushel.

Determine the price floor level

According to the problem, the government imposes a price floor of $4 a bushel.

Compare the equilibrium price with the price floor

Comparing the equilibrium price and the price floor, we see that the price floor (\(4) is higher than the current equilibrium price (\)3).

Analyze the impact of the price floor

Since the price floor is higher than the equilibrium price, producers are not allowed to sell corn for less than $4 a bushel. Therefore, the price of corn must rise to meet the price floor.

Select the correct answer

Based on our analysis, the correct answer is that the price of corn will increase to \(4 a bushel. Therefore, the answer is (a) increase to \)4.

Key concepts

Equilibrium Price

Understanding the equilibrium price in a market is essential for both consumers and producers. It is the price point at which the supply of an item is equal to its demand, meaning there is no surplus or shortage of the product. In our exercise, the equilibrium price of corn was established to be \(\$3\) per bushel. This would be the market price if no external factors influenced the market dynamics.

However, equilibrium can be disrupted by outside forces, such as government intervention. When a price floor is set above the equilibrium, like in our exercise, the market must adjust. This results in either a surplus of corn, as growers are willing to supply more at the higher price, or a change in demand at this new price level.

Government Intervention

Government intervention occurs when the government steps in to regulate market functions for a variety of reasons, which can include protecting producers, preserving jobs, or addressing unfair market practices. A common form of this is through the implementation of price floors or price ceilings.

In the context of our exercise, the government has imposed a price floor of \(\$4\) for a bushel of corn, which is above the equilibrium price. Such interventions are typically enacted to ensure that producers earn enough to cover their costs and sustain their livelihoods. While this can be beneficial for producers, it impacts the market by potentially creating excess supply and affecting the economic welfare of consumers.

Market Price

Market price is the current price at which a good or service can be bought or sold. It is determined by the forces of supply and demand in a free market. When a price floor is set, as in our exercise, the market price may change if the floor is above the natural equilibrium point. This artificial adjustment to the price does not reflect the true value of the product as valued by supply and demand forces but instead reflects the price that the government deems necessary or fair.

In practical terms, when the price floor is enforced, the market price can no longer float freely and settles at or above that minimum set value. This can lead to various market inefficiencies, such as surpluses when the market price is not allowed to fall to its natural equilibrium level.

Economic Equilibrium

Economic equilibrium is a condition where market forces are in balance. It is achieved when the amount of goods or services sought by buyers is equal to the amount supplied by sellers, resulting in a stable market price. When a price floor like the one described in our example is set above the equilibrium, it disrupts this balance.

The government-decreed price floor prevents the market price from settling at its natural point and can lead to excess supply, as not all of the corn that growers are willing to sell at \(\$4\) can be sold. Buyers may not find the higher price to be acceptable, and the unsold surplus may lead to inefficiencies in resource allocation, ultimately impacting the overall economy.