About 100 million pounds of jelly beans are consumed in the U. S. each year, and
ID: 1189459 • Letter: A
Question
About 100 million pounds of jelly beans are consumed in the U. S. each year, and the price has been about 50 cents per poun. However, jelly bean producers feel that their incomes are too low and have convinced the government that price supports are in order. The government will therefore buy up as many jelly beans as necessary to keep the price at $1 per pound. However, government economists are worried about the impact of this program because they have no estimates of the elasticities of jelly bean demand or supply. Given the market data shown in the graph, the price support costs the government $ ___ million.
Which of the following would increase the cost of the program?
A) The demand curve becomes relatively more elastic.
B) The supply curve becomes relatively more elastice.
C) The supply curve becomes relatively mor inelastic.
D) Both A and C.
E) Both A and B.
Price (S) 1.50-1 1.40 1.30 1.20 1.10 0.90 0.80 0.70 0.60 0.504 0.40 0.30 0.20 0.10 125 0.0 50 75 100 125 Quantity (millions of pounds)Explanation / Answer
Due to price Support Demand will reduce from 100 million pound to 75 million pound. Therefore, government will have to buy the reduced quantity.
Reduction in quantity sold = 100 million pounds – 75 million pounds
= 25 million pounds
New cost per pound = $1
Earlier price = $.50 per pound
Change in price = $1-$.50 = $0.50
Price support cost = ½ x change in price x change in quantity.
=1/2 x 0.50 x 25 million
=$6.25 million
The supply curve is getting more elastic as a result of support price and this will increase the cost of the program.
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