B caIstatelatinstructuretcom Worksheet 5 ECON 2010 Worksheet 5.docx c. Suppose that the stock market crashes and, as a result, people in Gotham City are poorer. This reduces the quantity of taxi rides demanded by 6 million rides per year at any given price What effect will the mayor's new policy have now? Illustrate with a diagram. d. Suppose that the stock market rises and the demand for taxi rides returns to normal (that is, returns to the demand schedule given in the table) The mayor now decides to ingratiate himself with taxi drivers. He announces a policy in which operating licenses are given to existing taxi drivers; the number of licenses is restricted such that only 10 million rides per year can be given. Illustrate the effect of this policy on the market, and indicate the resulting price and quantity transacted. What is the quota rent per ride? B caIstatelaiinstructureiccm Worksheet 5 ECON 2010 Worksheet 5.docx 2. In the late eighteenth century, the price of bread in New York City was controlled, set at a predetermined price above the market price, a. Draw a diagram showing the effect of the policy. Did the policy act as a price ceiling or a price oor? b. What kinds of inefciencies were likely to have arisen when the controlled price of bread was above the market price? Explain in detail. One year during this period, a poor wheat harvest caused a leftward shift in the supply of bread and therefore an increase in its market price. New York bakers found that the controlled price of bread in New York was below the market price. 0. Draw a diagram showing the effect of the price control on the market for bread during this oneyear period. Did the policy act as a price ceiling or a price oor? d. What kinds of inefciencies do you think occurred during this period? Explain in detail. 3. In 2019, the US. House of Representatives approved a new farm bill modifying the price supports for dairy farmers. The new program, the Dairy Margin Coverage, supports dairy B caIstatelaiinstructureicom Worksheet 5 ECON 2010 Worksheet 5.docx 3. In 2019, the US. House of Representatives approved a new farm bill modifying the price supports for dairy farmers. The new program, the Dairy Margin Coverage, supports dairy farmers when the margin between feed costs and milk prices falls below $0.08 per pound. Suppose that current feed costs are $010 per pound, which means the program creates a price oor for milk at $0.18 per pound. At that price, in 2019, the quantity of milk supplied is 240 billion pounds, and the quantity demanded is 140 billion pounds. To support the price of milk at the price oor, the US. Department of Agriculture (USDA) has to buy up 100 billion pounds of surplus milk The supply and demand curves in the following diagram illustrate the market for milk. B caIstatelaiinstructureicom Worksheet 5 ECON 2010 Worksheet 5.docx billion pounds, and the quantity demanded is 140 billion pounds. To support the price of milk at the price oor, the US. Department of Agriculture (USDA) has to buy up 100 billion pmmds of surplus milk. The supply and demand curves in the following diagram illustrate the market for milk. Price of milk (per pound) $0.25 0,18 0.15 \\ Price oor 0.05 O 140 200 240 Quantity of milk (billions of pounds) B caIstatelaJnstructurecom Worksheet 5 ECON 2010 Worksheet 5.docx a. In the absence of a price oor, how much consumer surplus is created? How much producer surplus? What is the total surplus (producer surplus plus consumer surplus)? b. With the price oor at $0.18 per pound of milk, consumers buy 140 billion pounds of milk. How much consumer surplus is created now? c. With the price oor at $0.18 per pound of milk, producers sell 240 billion pounds of milk (some to consumers and some to the USDA). How much producer surplus is created now? (1. How much money does the USDA spend to buy surplus milk? e. Taxes must be collected to pay for the purchases of surplus milk by the USDA. As a result, total surplus is reduced by the amount the USDA spent buying surplus milk. Using your B caIstatelaiinstructureiccm Worksheet 5 answers from parts b, e, and d, what is the total surplus when there is a price oor? How does this total surplus compare to the total surplus without a price oor from part a? 4. The accompanying table shows hypothetical demand and supply schedules for milk per year. The US. government decides that the incomes of dairy farmers should be maintained at a level that allows the traditional family dairy farm to survive. So it implements a price oor of $1 per pint by buying surplus milk until the market price is $1 per pint. Quantity of milk (millions of pints per year) Price of milk (per pint) Quantity demanded Quantity supplied $1.20 550 850 1.10 600 800 1.00 650 750 0.90 700 700 0.80 750 650 a. In a diagram, show the deadweight loss from the inefciently low quantity bought and sold. b. How much surplus milk will be produced as a result of this policy? B caIstatelaiinstructureicom Worksheet 5 ECON 2010 Worksheet 5.docx a. In a diagram, show the deadweight loss from the inefciently low quantity bought and sold. b. How much surplus milk will be produced as a result of this policy? c. What will be the cost to the government of this policy? d. Since milk is an important source of protein and calcium, the government decides to provide the surplus milk it purchases to elementary schools at a price of only $0.60 per pint. Assume that schools will buy any amount of milk available at this low price. But parents now reduce their purchases of milk at any price by 50 million pints per year