An all-natural drink synthesized from the extract from unusual kola nuts, is produced and consumed only in the country of Puglonia.The market for the drink initially has the following characteristics:

1.The market has two phases, winter and summer, and each lasts for 6 months of the year. There is no government policy toward the market.There are no externalities from this product.

2.The industry is competitive, and the same upward-sloping market supply curve applies in each of the two halves of the year.Firms in the industry produce and immediately sell the product in each half year, as shown by the supply curve for each half year.(The attached graphs show this market supply curve and the two halves of the year.)

3.The market demand curve is downward-sloping in each half year, and market demand varies between the two halves of the year.Also, when people buy the drink, they consume it on the same day that they buy it.

4.The market price during the winter is $12 per liter, and the market price during the summer is $18 per liter.

5.There is no general growth in the market?each year has the same fundamental characteristics as the year before.

You can assume, if you need to, that the (short-term) interest rate is so low that you can ignore it.

A.Show graphically and explain how the market works, showing the situations in each of the winter phase and the summer phase.What is the total surplus created by the market over a one-year period?

B.You have been hired by an activist organization to make the case that there is a role for a government agency in this situation.Specifically, the government agency will be charged with setting target prices that will apply to each of the two half-year phases.For each of the two half-year phases, the government agency will commit to buying or selling the drink at the target price for that half-year phase.

(To sell the drink, the government agency of course must have purchased it at some time in the past.Up to now, it had not been possible to store the produced drink for future sale.A government research lab has just perfected a way to store large amounts of the drink at almost no cost, with no spoilage.)

You have been asked to make the case that this activity by the government agency can benefit Puglonia.You are told that the agency will have access to both sufficient amounts of funding from the government and the new government-developed storage technology.

What will you say in your report that makes the case for this government agency?Specifically, how should the agency decide on the best target price to use for each of the two half-year phases?Why is an agency that operates in this manner desirable for the country?In your answer, use one or more of the graphs and refer to the graph(s) as appropriate.

C.After completing your report, you are then hired by a different group that wants to make the economic case that there should really be no role for a government agency such as the one described in question B.What will you say in the executive summary of this second report?

Winter Summer $/unit $/unit So So units units