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IAI Actuarial Core Principles · Business Economics · Government intervention in a market

A government sets a binding minimum price for sugarcane above the market equilibrium and promises to buy any unsold output. Which outcome is most directly implied?

Government spending rises. A binding floor above equilibrium raises quantity supplied and cuts quantity demanded, creating a surplus, and since the government buys all unsold cane, it bears the cost of purchasing and storing that excess.

  1. AGovernment spending rises as it buys the surplusCorrect
  2. BConsumers buy more cane at the lower price
  3. CFarmers reduce production because prices are guaranteed
  4. DDemand for cane shifts rightward
  5. A shortage emerges at the minimum price

Explanation

A binding price floor raises quantity supplied and lowers quantity demanded, creating a surplus. Because the government commits to buy the excess, its expenditure rises. A shortage and a lower consumer price are the wrong direction, and the floor moves along the demand curve rather than shifting it.

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