Consider the potato market in Alberta. The demand curve and supply curve are given by

Demand: Q = 6 - P,

Supply: Q = P + 2 ,

where the price of potatoes is given per pound and the quantity of potatoes is measured in pounds.

1. Draw a graph of the supply and demand curves in this market. Find the equilibrium price and quantity on this market.
2. Suppose the government sets the price ceiling at P = $4/lb. Find the new equilibrium price and quantity on this market and determine whether or not there is excess demand or excess supply.
3. Now, in an attempt to raise farmer revenue, the government implements a price support program with price floor at P = $3/lb. How many units of potatoes will be demanded by consumers with this price floor? How many units of potatoes will be supplied with this price floor? At the price floor determine whether or not there is excess demand or excess supply in the market for potatoes.
4. Find the direct cost to the government for this support program described in part (c). In your graph shade the area that represents the direct cost. Suppose further that there is a storage cost of $2 per pound of potatoes purchased by the government. Find the total cost of the support program, including the storage cost.
5. Suppose the government decides to support this price floor using a subsidy program. There is no longer a cost for storage, and the guaranteed price equals the floor price, P = $3/lb.

How many units of potatoes will be demanded by consumers with this subsidy program?

How many units of potatoes will be supplied with this price subsidy program?

What is the cost to the government for this subsidy program? In your graph shade the area that represents the cost to the government for this subsidy program and label this area clearly.

What is the cost to consumers of this subsidy program? In your graph shade the area that represents the cost to consumers of this subsidy program and label this area clearly.