CONTEXT TO THE QUESTION- Orgakola, 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 orgakola 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 orgakola, 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 marketeach year has the same fundamental characteristics as the year before.

[In your answers, you may use the graphs on the attached page, adding any lines, curves, or labels that you need. You may also draw your own half-year-phase graphsthese should be essentially the same as those shown on the attached page.]

[In your answers to the questions in this Part, you can assume, if you need to, that the (short-term) interest rate is so low that you can ignore it.]

QUESTION:

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 orgakola at the target price for that half-year phase.

(To sell orgakola, the government agency of course must have purchased orgakola at some time in the past. Up to now, it had not been possible to store produced orgakola for future sale. A government research lab has just perfected a way to store large amounts of orgakola 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.

Winter Summer S/unit S/unit So So units units