The U.S. Department of Agriculture guarantees dairy producers that they will rec

Question

The U.S. Department of Agriculture guarantees dairy producers that they will receive at least $1.00 per pound for butter they supply to the market. Below is the current monthly demand and supply schedules for wholesale butter (in millions of pounds per month) Market for Wholesale Butter Quantity of Quantity of Butter Supplied Butter Demanded Ints Price (dollars (millions of (millions of per pound) $0.80 0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80 pounds) 109 106 103 100 97 94 pounds) 65 73 81 89 97 105 113 121 129 137 145 Print 85 82 79 Instructions: Round your answer for price to two decimal places. Enter your answers for quantity as a whole number a. What are the equilibrium price and quantity in the wholesale butter market? million pounds b. What is the monthly surplus created in the wholesale butter market due to the price support (price floor) program? O 79 million pounds O 11 million pounds O 22 million pounds O Zero

Explanation / Answer

24)

a) The equilibrium is where the demand equals supply. This happens at

P = $1.20

Q = 97 million pounds

b) At Price support P=$1, Quantaity demanded = 103 and quantity supplied = 81. At price floor there is shortage as demand> supply.

Thus there is a monthly surplus created of zero pounds.

c) New supply = initial supply + 40

d)

At the support price, the new supply = 121 million pounds.

Surplus = New supply –Demand = 121-103 = 18 million pound

Price Quantity demanded Initial supply New quantity of butter supplied 0.8 109 65 105 0.9 106 73 113 1 103 81 121 1.1 100 89 129 1.2 97 97 137 1.3 94 105 145 1.4 91 113 153 1.5 88 121 161 1.6 85 129 169 1.7 82 137 177 1.8 79 145 185

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