Question
. Consider the market for wheat in the United States. Suppose that the supply and demand curves in this unregulated competitive market are given by:
. Consider the market for wheat in the United States. Suppose that the supply and demand curves in this unregulated competitive market are given by:
P = 12 â QD P = 4 + QS
- What is the equilibrium price and quantity in this market? (1 point)
- Sketch a graph of this market and label the consumer surplus and producer surplus. (1 point)
- Calculate the consumer surplus and producer surplus. (1 point)
- Now suppose that the government implements a price support of $10 per bushel.
- What is the private quantity demanded at a price of $10? (1 point)
- What is the quantity supplied at a price of $10? (1 point)
- How many bushels of wheat does the government have to buy? What is the governmentâs total expenditure on wheat? (1 point)
- Sketch a graph of this market with the price ceiling and label the new consumer surplus and the new producer surplus. (1 point)
- Calculate the new consumer surplus and the change in consumer surplus. (1 point)
- Calculate the new producer surplus and the change in the producer surplus. (1 point)
- Calculate the deadweight loss of this policy. (1 point)
2. Consider yourself as a city planner. The Atlanta city is considering a proposal to award an exclusive contract to Camcast (which is a monopolist) because of her fantastic internet service, as well as magnificent customer service! Now, you are going to hire an economist (one of your colleagues, maybe) to generate the demand, and total cost given below:
P = 30 - 0.01 * Q
TC = 5,000 + 0.02 * Q2
Use this information to answer the following questions:
- What are the marginal cost and marginal revenue? (2 points)
- What price, quantity, and profit would be expected if Camcast is allowed to operate without
- any government regulation? (3 points)
- You are asked to recommend a price and quantity that would be socially efficient. Recommend a price and quantity to the city council using economic theory to justify your answer. (2 points)
- Compare the economic efficiency implications of the answer to part (a) with the answer to part (b). Which equilibrium is better for society? Draw a graph illustrating the two equilibria and label the deadweight loss created by the less efficient equilibrium. (3 points)
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