Question

2. The market price for ton of corn is $1,000. In an effort to provide an incentive to farmers to grow more corn, the U.S. imposed a price floor on the price of corn of $1,200. How will consumers react and what will be the end result of this action?

Answer 1

As, the government of the United States has applied price floor on the price at $1200, the minimum price to sell corn becomes $1200 which is more than the market equilibrium price of $1000. Hence, it would reduce the consumer's surplus.

Due to increase in price, consumers will stop purchasing corn as, according to the law of demand, the quantity demanded of any commodity or service are inversely proportional to its price. And then this lack of demand would again cause loss to the farmers at the end.