Question

Indian government realized free market price of wheat is very low. To
increase farmers’ welfare government took the following steps:
a) Suppose the government imposes a binding price floor in the
wheat market. How this policy will affect the price, quantity
demanded and quantity supplied of wheat.
b) Wheat farmers complained that this binding price floor reduced
their revenue. Explain how it reduced their revenue.
c) In response to wheat farmers’ complaints, government purchases
all the surplus quantity at the minimum price decided by the
government. Who are the beneficiaries and who loses due to this
price floor? (400-500 words w diagram for better understanding)

Answer 1

A)It will increase the price at which good will be sold.

It will decrease the quantity demanded and increase quantity supplied..

B) Due Decrease in quantity demanded.The actual quantity sold is lower than before,which lead to decrease in total revenue of farmers even price increased.

C)Farmers are the beneficiaries as their total income Increases as goverment buys all surplus quantity.

The CONSUMERs are the losers as they have to pay higher price ,which lead to decrease in Consumer surplus.