For an agricultural good, qD = 400 – 2p and qS = 100 + 4p (p in rupees). The government sets a support price of Rs 60 and buys the surplus at that price. How much does the government spend on buying the surplus?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs 3,600
Given:
qD = 400 − 2p
qS = 100 + 4p
Support price = Rs 60
The support price is a price floor. If it is above the equilibrium price, there is a surplus, and the government buys it at the support price.
Equilibrium price:
\( 400 - 2p = 100 + 4p \)
\( 6p = 300 \)
\( p^* = 50 \)
At Rs 60, which is above Rs 50:
\( q^D = 400 - 2(60) = 280 \)
\( q^S = 100 + 4(60) = 340 \)
\( \text{Surplus} = 340 - 280 = 60 \)
\( \text{Spending} = 60 \times 60 = 3600 \)
The government spends Rs 3,600. Pricing the surplus at the equilibrium price of Rs 50 would give Rs 3,000, but the government pays the support price.
NCERT (2026-27): “5.2.2 Price Floor … Figure 5.8 shows the market supply and the market demand curve for a commodity on which price floor is imposed. The market equilibrium here would occur at price p* and quantity q*. But when the government imposes a floor higher than the equilibrium price at pf , the market demand is qf whereas the firms want to supply q′f, thereby leading to an excess supply in the market equal to qf q′f . In the case of agricultural support, to prevent price from falling because of excess supply, government needs to buy the surplus at the predetermined price.” |