Question

Demand for sugar: Q = 18-P

Supply of sugar: Q = 4+P

Quantities are in million hundredweight (cwt.) and the price is in dollars per cwt.

1. What is the equilibrium price and quantity of sugar in the absence of any agricultural policy?

2. If the government establishes a support price for sugar of $9 per cwt. (hundred pounds) and is willing to purchase any surplus sugar at that price, indicate on your graph the quantity supplied, quantity demanded, and quantity purchased by the government. If the units are million cwt., how much money does the government spend on its sugar purchases? Show this amount on your graph.

3. The government decides that the sugar price support program is getting too expensive. It abandons the support-price program and instead assigns a marketing quota to each sugar producer. This quota is gives the holder the right to sell sugar on the market and can be transferred to other producers. Altogether the quotas allocated to sugar growers add up to 8 million cwt. Please graph this problem, indicating clearly the market price and quantity.

4. If there is a free market for renting quota, what is the maximum price per cwt that the quota should rent for? If a farmer with marginal production costs of $6 per cwt. owned quota, would it be more profitable for her/him to produce the sugar or to rent the quota to someone else? Please explain.

Answer 1