Question

PRICE STABILIZATION SCHEME: SHOW YOUR WORK! 30. Consider the market for tea in a certain country and graph it NEATLY on a separate sheet: (10 pts) Price per Ton Demand for Tea Supply of Tea of Tea (thousands of (thousands of tons) tons) $20 10 $19 $18 $17 $16 $15 35 $14 30 $131 24 $12 42 18 $11 48 15 $10 55 12 13 16 30 35 A. What is the market price of tea? What quantity will be bought and sold? (3 pts) $14, 30 thousand tons B. Facing pressure from tea growers, the government decides the free maket price of tea is too low for growers to make a decent living. Suppose the government imposes a price floor that is $2 higher than the market price. What is the effect of this policy on the price of tea and the quantity of tea sold? Is there a shortage or surplus of tea, if any? By how much is the excess? Indicate these changes on your graph. (5 pts) C. Tea growers complain that the price floor has reduced their revenues and they are actually worse off than before. In response to these complaints, the government agrees to purchase any surplus tea at the price floor. How much will the government spend? Compared to the basic price floor, who benefits from this new policy? Who loses? Explain your answer and indicate the changes on the graph. (5 pts)

Answer 1

& Surplus Shenease Tea Quantity of (A) The market price of Tea occurs at the point where demand for Tea= supply of Tea. Thus, Market price - 414 Price Quantity bought and sold = 30 7 8147 Thousand tons. - 1x braduar & At a price floor higher than 414, the new rice of Tea= $16. Quantity of Tea sold = us units Quantity of Tea demanded= 20 writs . Thus it leads to surplus of Tea as Quantity supplied is more than Quantity demanded. I surplus = 45- 20 = 205 thousand Tons a Conernment will spend a surplus x 16 - 25x16= $400 thousand. The producers benefit as producer surples will not increase. Frutial producer surphes a are (2) tare (3) Additional e " due to Government purchase = ak (14) to at 15). X Tea