Question

Suppose the demand function for corn is Qd = 10 – 2p, and supply function is Qs = 3p

– 5. The government is concerned that the market equilibrium price of corn is too

low and would like to implement a price support policy to protect the farmers. By

implementing the price support policy, the government sets a support price and

purchases the extra supply at the support price. In this case, the government sets the

support price p = 4

2c. Draw a diagram to show the change the producer surplus due to the

implementation of the price support policy. Calculate the change in the producer

surplus.

2d. Draw a diagram to show the change in the consumer surplus due to the

implementation of the price support policy. Calculate the change in the

consumer surplus.

2e. Calculate the cost to the government to implement the price support policy.

Draw a diagram to show the government cost.

2f. Support now the government switches from price support policy to subsidy

policy. For each unit of corn produced, the government subsidizes the farmer

s=5/3. Find the new equilibrium price under this subsidy policy. How much

money will the government have to spend in order to implement this subsidy

policy?

Answer 1