Here's a question which I don't quite know how to answer. Originally, my answer was (D), though when I checked it the correct answer was (A). As far as my knowledge goes, buffer stocks are buying/selling of stocks by the government to help manipulate supply. Please help provide some elucidations, many thanks. enter image description here


The answer is indeed A:

Initial farm income is $\$5 \times 2,000 = \$10,000$.

If the supply is $S_2$, then current income is below that figure. However, if the government takes away from the market 1,000 tonnes, then the supply curve will shift left by that amount, resulting in a new equilibrium with 4,000tonnes @ \$2. Therefore farm income is now: $\$2 \times 4,000 = \$8,000$. The government buys the buffer at market price, thus $\$2 \times 1,000 = \$2,000$. We end up with the same farm income as in the initial situation: $\$8,000 + \$2,000 = \$10,000$.

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  • $\begingroup$ Oh I see now, I forgot to add on what the farmers' revenue from the govt would be (2x1000), your explanations are very clear, many thanks. $\endgroup$ – user98937 Jan 4 '16 at 11:23

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