18.9 Business and Policy Application: Subsidizing Corn through Price Floors: Suppose the domestic demand and supply for corn intersects at p*, and suppose further that p* also happens to be the world price for corn. (Since the domestic price is equal to the world price, there is no need for this country to either import or export corn.) Assume throughout that income effects do not play a significant role in the analysis of the corn market.

A. Suppose the domestic government imposes a price floor p that is greater than p* and it is able to keep imports of corn from coming into the country.

a. Illustrate the disequilibrium shortage or surplus that results from the imposition of this price floor.

b. In the absence of anything else happening, how will an equilibrium be reestablished and what will happen to producer and consumer surplus?

c. Next, suppose the government agrees to purchase any corn that domestic producers cannot sell at the price floor. The government then plans to turn around and sell the corn it purchases on the world market (where its sales are sufficiently small to not affect the world price of corn).

Illustrate how an equilibrium will now be reestablished, and determine the change in domestic consumer and producer surplus from this government program.