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5. Demand and supply in the wheat market are given by: QD = 2000 - 1000 P and QS = -500 + 1000 P where

5. Demand and supply in the wheat market are given by:

QD = 2000 - 1000 P and QS = -500 + 1000 P

where Q is millions of bushels and P is price per bushel.

a. Find the equilibrium price and quantity.

b. Suppose that the government wishes to support farm income and thus sets a price floor of $1.50/bushel. Find the

size of the farm surplus.

c. What is the cost of this program to the government?

6. The initial price of a cup of coffee is $1, and at that price, 400 cups are demanded. If the price falls to $0.90, the

quantity demanded will increase to 500.

a. Calculate the (arc) price elasticity of demand for coffee.

b. Based on your answer, is the demand for coffee elastic or inelastic?

c. Based on your answer to a., if the price of coffee is increased by 10%, what will happen to the revenues from

coffee? Carefully explain how you know.

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