Question

2. A market for agriculture produce can be described by two linear equations. Demand is given by P = 170− (1/6)Q, and supply is given by P = 50+(1/3)Q, where Q is the quantity and P is the price.

a) Graph the functions and find the equilibrium price and quantity.

b) Now the government implements a supporting price of $140. Calculate the surplus (excess supply), the consumer surplus and producer surplus.

c) Suppose the government instead chose to maintain a price of $140 by a system of quotas. What quantity of quotas should the government make available to the suppliers?

d) Suppose that, at the supporting price, the government buys up all of quantity supplied that is not demanded and exports it at a price of $80 per unit. Compute the loss to the government of this operation.

Answer 1

A) graph

Eqm P= 130, Q= 240

B) at P= 140,

Then Qd = 6(170-140) = 6*30 = 180

Qs = 3*(140-50) = 270

Excess Surplus = Qs - Qd

= 270-180

= 90

CS = .5*(170-140)*180

PS = (140-110)*180+ .5*(110-50)*180

= 5400+ 5400

= 10,800

C) export Quota is imposed

Quota size = 90 units

d) total govt Spending, if excess produce is bought by govt = 90*140

= 12600

Total earning from exports = 90*80

= 7200

So loss = 7200-12600

= $ 5400