Question

TEXAS A&M INTERNATIONAL UNIVERSITY A.R. SANCHEZ, Jr. SCHOOL OF BUSINESS Course: ECO 2302: Principles of Instructor: Dr CONSTANT YAYL Activity: Welfare analysis of agricultural price support Microeconomics andRDGORto a CaUZAoodLoz -SPRING 2922, In the absence of a price support program, the intersection of the market market supply curve in the figure below determines the competitive With a price support on soybeans of p- $5.00 per bushel and the government's pledge to buy as much output as farmers of p, consumers buy less output, Od-1.9 billion bushels, than the Q1 they would have bought at the market-determined price pl. The government buys Og-s-Qd- 0.3 billion bushels per equilibrium, e want to sell, quantity sold is Qs-22 billion bushels. At a price support year, which is the excess supply I. Determine the Consumer Surplus CS, Producer Surplus PS, Total Surplus (Total Welfare) W, before and after the price support. What is the deadweight loss? P- 5.00 Price support 3.60 MC 1.9 0,-21 ,-22 O- 0.3 Q Billion bushels of soybeans por yoar No Price Support Price Support Change onsumer Surplus, CS oducer Surplus, PS overnment Expense, -X ot Government Revenue tal Welfare (W-CS+PS-X)

Answer 1

	No price Support	price Support	Change
Consumer Surplus	A + B + C	A	B + C
Producer Surplus	E + F	B + C + E + F	B + C
Government Expense	-------	C + D + F + G	C + D + F + G
Total Welfare ( CS + PS + GE )	A + B + C + E + F	A + B + C + D + E + F + G	D + G

Explanation

Government Expenses :

When there is No price Support there is no expenses for government. However, when government introduces price support on soybeans at P = $5.00, at price Support Quantity supplied (Q_S) is 2.2 billion where as quantity demanded (Q_d) is 1.9 billion. so, the difference of 0.3 billion is actual government  Expense. Which is equal to the area C + D + F + G.