If the market for apples and pears are initally free of govt. intervention and in perfect competition.?

Question

Prices settle at $1 lb for apples and $2 lb for pears. (i) Imagine that apple growers successfully lobby for price floors for apples and govt. set a min. price of $2lb and agrees to buy surplus apples. Assume that govt. will need to buy 100million lbs. (a)How much will govt. spend buying apples? (b) What would happen if govt. set legal price floor but did not buy the surplus. Describe the reason.

Answer 1

(i)

(a) 100*2=$200 millions

(b) traders would create black market for cheaper prices to get rid of surplus. Another scenario in short-run is possible too - extra apples would be transmitted to another use, or producers could create monopoly by artificially reducing demand (thus eliminating some apple-farms or changing their business-type).