Question

Problems 16-19 are based on the following demand and supply schedules for corn (all quantities are in mil- lions of bushels per year). Price per bushel Quantity demanded Quantity supplied $0 2 16. Draw the demand and supply curves for corn. What is the equilibrium price? The equilibrium quantity? 17. Suppose the government now imposes a price floor at $4 per bushel. Show the effect of this program graphically. How large is the surplus of corn? 18. With the price floor, how much do farmers receive for their corn? How much would they have received if there were no price floor? 19. If the government buys all the surplus corn, how much will it spend?

Answer 1

The diagram for the above problems can be found in the snapshot attached below.

und Curne - Supply corne 4 Equilibrium - - T - 27.- it --- - Quantity 1 2 3 4 5 6

Explanations for the answers are typed below.

16. The equilibrium price and quantity can be seen from the intersection of the demand the supply curves (denoted by point E) in the diagram above. Equilibrium price = $3 and equilibrium quantity = 3 million bushels.

17. The price floor of $4 imposed by the government is depicted by the black horizontal line in the diagram. At a price of $4, demand (denoted by point B) = 2 million bushels, whereas the supply (denoted by point A) = 4 million bushels. There is an excess supply (surplus of corn) in the market of 2 million bushels (4 - 2 or the distance between the points A and B).

18. With the imposition of the price floor, the farmers receive $4 per bushel, whereas in the absence of the price floor, the farmers would have received the equilibrium price = $3 per bushel. In terms of revenue, they are able to sell 2 million bushels at $4 per bushel = $ 8 million in revenue. However, in the absence of the price floor, the farmers would have been able to sell 3 million bushels at $3 per bushel = $ 9 million in revenue. Due to the imposition of the price floor, the farmers loose out on $ 1 million of revenue = Dead Weight Loss.

19. If the government buys all the surplus corn = 2 million bushels, it will have to pay $ 4 per bushel for 2 million bushels. The cost of which = $ 8 million.