2. Suppose that the market demand curve for wheat is Qd = 300 - 5P and the marke

Question

2. Suppose that the market demand curve for wheat is Qd = 300 - 5P and the market supply curve is Qs= -150+10P.

(i) What is the equilibrium price and equilibrium quantity?

(ii) Suppose the government decides to have a “price support program” with a price floor set at PF = 40. Under a price floor program, the government sets this price and the producers decide how many units they want to sell. The consumers pay the support price for the units they buy, while the government buys up the excess supply. What is the excess supply in this market? What is the cost of this program to the government?

(iii) Suppose, instead, the government decides to have a “government subsidy program” with a guaranteed (or target) price of PT = 35. Under this program, the producers decide how many units they want to sell, but they also have to sell all the units to the consumers. There is no excess supply. What is the price to consumers? What is the subsidy per unit the government has to pay? What is the cost to the government for this program?

(iv) If a government wants to compare the following policies: price-support programs and subsidy programs, which program do you think involves an extra cost compared to the other one?

Explanation / Answer

i) At equilibrium supply = demand Qd = 300 - 5P Qs= -150+10P Qd = Qs 300 - 5P = -150+10P 450 = 15P equilibrium Price, P = 30 equilibrium quantity, Qd = 300 - 5*30 = 150 ii)At PF = 40 Qs= -150+10*40 = 250 Producers will sell 250 units Qd = 300 - 5*40 = 100 Consumers will buy 100 units excess supply = 250-100 = 150 units Cost to govt = 150*40 = $6000 iii)At PT = 35 Qs= -150+10*35 = 200 Producers will sell 200 units All the units are sold to consumers Qd = 300 - 5*P 200 = 300 - 5P P = 20 Consumers will buy 200 units at P = 20 Government subsidy = 35-20 = $15 cost to the government for this program = $15*200 =$3000 Cost to govt = 150*40 = $6000 iv) Price support program involves more cost than subsidy program.

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