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The government has decided that the free market price of cheese is too low.

Farmers complain that the price floor has reduced their total reven...

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The government has decided that the free market price of cheese is too low.

Farmers complain that the price floor has reduced their total revenue.
Is this possible?
Explain

Answer

Revenue is the product of price times volume (R = P * V).
The problem for the farmers is that because the price of cheese (P) went up, demand for it (V) went down.
Essentially, the government raised prices to a level higher than what many people wanted to pay.
The farmers made more money with lower prices because they sold a lot of cheese (a high volume, in the terminology of the formula).
The potential for these artificial imbalances is why markets are generally more effective than governments at setting prices.

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Virtual Teaching Assistant: Colleen R.
Question Level: Basic
Karma: Free
Upload Date: 5/31/2017

This 29 words question was answered by Colleen R. on StudySoup on 5/31/2017. The question contains content related to Business Since its upload, it has received 244 views.

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