Figure 7.2.Defending the Target Price in Face of Changing Supply Conditions -Consider Figure 7.2.Suppose the supply of tin increases from S₀ to S₁.Under a buffer stock system,the buffer-stock manager could maintain the target price by: A) Purchasing 15 pounds of tin B) Purchasing 30 pounds of tin C) Selling 15 pounds of tin D) Selling 30 pounds of tin

Question

Quizplus · Accepted Answer

With the increase in supply, the equilibrium price will decrease from P1 to P2. In order to maintain the target price, the buffer stock manager needs to purchase tin from the market. As the difference between the target price and the new equilibrium price is 30, the buffer stock manager needs to purchase 30 pounds of tin to maintain the target price. Therefore, the correct choice is option B.

Figure 72Defending the Target Price in Face of Changing Supply Conditions