Question

In 2016,the government ofanation establisheda

price support for wheat.The government's sup

port price has been above the equilibrium price

each year since,and the government has pur

chased all wheat over and above the amounts that

consumers have bought at the support price.

Every year since 2016,there has been an increase

in the number of wheat producers in the market.

No other factors affecting the market for wheat

have changed.Predict what has happened every

year since 2016,to each of the following:

a.Amount of wheat supplied by wheat producers

b.Amount of wheat demanded by all wheat con

sumers

c.Amount of wheat purchased by the government

Short answer

Supply: increased

Demand: fell

Government had to purchase more.

Step-by-step solution

Step1. Given information

The government has fixed a support price above the equilibrium level for wheat, and it purchases any additional quantity.

Step2. a. Explanation

a. Since, the support price imposed is always above the equilibrium price, the number of suppliers will keep adding, and hence the supply in the wheat market will keep rising.

Step3. b. Explanation 

b. Since the price support each year is greater than the equilibrium price, the demand will keep falling with each passing year.

Step4. c. Explanation

Since the demand is falling and the supply rising, the difference between the two, i.e., excess supply will keep rising. Hence, government spending to purchase the excess supply will keep rising.