Question

Is this the correct answer?

Answer 1

To be honest, these answer choices are a bit baffling. The best answer in my opinion would be to do at least two of the three options given below.

1. Place a price floor above the equilibrium.
2. Decrease imports from other countries.
3. Reduce current supply (reduce herd sizes).

Doing that should increase the prices.

Placing a floor above equilibrium will force the equilibrium to move upward, and with the reduce in supply from other countries, demand will shift toward the domestic producers. Without the demand shift, there simply would be an oversupply or surplus of dairy. Either the surplus is thrown away or its simply housed somewhere else (often at taxpayer expense).

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If you place a ceiling below equilibrium, then the price will go down to that ceiling value. That will be the highest price possible. This is the opposite of what the farmers want. It gets even worse when you increase milk imports (since supply goes up leading to further reduced prices). So that rules out choice A.

If you place a ceiling above equilibrium, then nothing happens. The price stays at equilibrium. Nothing too exciting here. This rules out choice B (though I agree with the "decrease imports" portion).

If you set a floor below equilibrium, then nothing happens similar to the last paragraph above. The price stays where it is. We can rule out choice C. Reducing herd sizes will reduce supply so that could maybe increase prices.

I'm not really familiar with the term "arbitrage" so I probably won't be any help here. That seems like an answer choice that is a distraction, but I'm not sure.