Question

2. Assume the government wants to increase the price of soybeans but they don’t want to purchase surplus beans, in this market. This leaves them with two modern strategies for inflating the price. Graphically show using supply and demand analysis each option in which may succeed in this goal, noting the surplus found in the market if any in these graphs. (note: This question takes two graphs to completely answer) (4 points)

Answer 1

In order to increase the price of soy beans.

1.. The Goverment can place a tax , which will increse the price of the soybeans.

2, The government can place a quota, restricting suppliers to supply quantity less than the equilinrium quantity.

Graph

Tax

When The govt puts tax, the prce increases from P* to P1, and the quantity demanded reduces from Q* to Q1.

The surplus amount of soybeans in the ,market is Q* - Q1

2. When govt puts a quota.

When Govt places a quota on the production of soybeans. i.e it reduces the soybeans produced to Q2, the prices increase to P2

Since the equilibrium quantity of soybeans is Q*, the excess surplus is Q* - Q2.