A. Suppose again that a price floor p̅ greater than the equilibrium price p^∗ has been imposed and that the government has committed to purchase the difference between what is supplied at the price floor and what is demanded.

(a) If you have not done so in exercise 18.9, illustrate the smallest possible deadweight loss in the absence of the government purchasing program as well as the deadweight loss if the government purchases the excess corn and then sells it at the world price p^∗.

(b) How would the deadweight loss change if the government found a way to give the corn it purchases to those consumers that place the highest value on it.

(c) What happens to the deadweight loss if the government instead sets a price at which all the excess corn gets sold assuming it can keep those who purchased at the price floor from buying at the lower government price?

 (d) Compare your answers to (b) and (c)—they should be the same. Can you explain intuitively why this is the case?

(e) Consider the policy as described in (c). After the initial set of consumers purchase corn at the price floor, illustrate the demand curve for the remaining consumers—and the supply curve for corn from the government. What’s the elasticity of supply of government corn — and at what price must this supply curve cross the demand curve of the consumers who did not buy at the price floor?

(f) Finally, suppose that everyone (including those with marginal willingness to pay the exceeds the price floor) wants to buy at the lower government price but the government still agrees to buy any amount of corn that producers are willing to supply at the price floor. What will happen—and how will it affect the deadweight loss?

(g)Why is your answer again the same as under the previous policies?

B. Consider again, as in exercise 18.9, a demand curve p̅ = 24−0.00000000225x supply curve is given by p = 1+0.00000000025x.

(a) Calculate consumer surplus, producer surplus and deadweight loss under the scenario described in A (b) assuming a price floor of p = 3.5.

(b) Consider the scenario described in A (c). Derive the demand curve that remains once the consumers who are willing to purchase at the price floor.

(c) Given the quantity supplied to the remaining demanders by the government, what is the price the government has to charge to sell all the excess corn. Calculate consumer and producer surplus and verify that the deadweight loss is the same as in (a).

(d) Finally, consider the scenario in A (f). Verify that the price the government has to charge to sell all its corn is the same as in (c). Then calculate consumer surplus, producer surplus and deadweight loss.