Suppose the government implements a policy to keep the price of widgets at $7 per unit. This policy results in a __________ of an amount equal to _______ units. If this policy consists of a buyout program whereby the government buys whichever units necessary to prevent the price from falling below $7, what would be the government expenditure with this buyout program? (Fill in the blanks and answer the question.)

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BlackTom AI · Accepted Answer

To approach this problem, I’ll first identify what a price floor at $7 does in a market with standard downward-sloping demand and upward-sloping supply, using the provided graph.
Option A: short age, 4, $8 — Why this is unlikely: A price floor above equilibrium typically creates a surplus, not a shortage. Since the floor is at $7 and the equilibrium price on the graph is below 7, this option’s classification as a shortage contradicts the basic outcome of a binding price floor. Additionally, the implied government outlay of $8 for 4 units would require a price of $2 per unit or 2 units purchased at $4, which doesn’t align with a $7 price or the graph’s quantities.
Option B: shortage, 6, $16 — Why this is unlikely: A shortage occurs when price is set below equilibrium, but here the price floor is above equilibrium, which should generate surplus, not shortage. The quantities given (6 units) would imply demand exceeds supply at $7, which contradicts the graph where demand at $7 is smaller than supply. The expenditure figure $16 would require buying 2 units at $8 or 4 units at $4, neither of which matches a $7 floor with the relevant surplus.
Option C: surplus, 4, $28 — Why this is plausible: At a $7 price floor, the quantity supplied exceeds quantity demanded, creating a surplus. From the graph, at price $7, quantity supplied is 7 units and quantity demanded is 3 units, yielding a surplus of 4 units. If the government implements a buyout to prevent the price from falling below $7, it would purchase the 4 excess units. The government expenditure would be 4 units × $7 per unit = $28. This aligns with the graph’s coordinates and the described buyout program.
Option D: surplus, 8, $4 — Why this is unlikely: While the situation is a surplus, the magnitude is incorrect. The surplus derived from the graph at $7 is 4 units, not 8, and the corresponding expenditure would be 4 × $7 = $28, not $4. An $8 per-unit or $4 total expenditure would not reflect the required purchase of the surplus units at the floor price.

ECON 1101 In-Class Activity 4 (Lectures): Government Policies and Efficiency of Market Outcomes

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ECON 1101 In-Class Activity 4 (Lectures): Government Policies and Efficiency of Market Outcomes

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