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Problem 3 In a fictional country, farmers expect that at harvest season the demand for cassava will be Qd = 100 - 10P where P is the price of a bushel and quantity is measured in million of bushels. Once cassava has been planted, the short run supply of cassava is Qs = 4 + 20P a) In a diagram, draw the market demand, the market supply and indicate the equilibrium price and quantity. What market price do farmers expect to receive on cassava? b) Compute the Consumer Surplus, the Producer Surplus, and the Total Surplus when the market is in equilibrium. Suppose that, once fixed costs are factored in, the break-even price of cassava is $4. c) Do farmers plant cassava this year? Now, let's see if from a social point of view cassava should be planted this year. We compare the overall social benefit from cassava to the overall social cost of growing cassava. Problem Set 5 Intermediate Microeconomics Spring 2020 Prof. Musatti The overall social benefit from cassava is the sum of the money buyers spend on cassava and the consumer surplus when the cassava market is in equilibrium. The overall social cost of producing cassava is the product of the break-even price and the quantity of cassava when the market is in equilibrium. d) Does the overall social benefit from cassava exceed the overall cost of producing cassava? e) What would be the social loss from not planting cassava this year? Suppose government decides to support the market for cassava by introducing a deficiency payment system with a target price of P = $4. ) Would now farmers plant cassava this year? Keep in mind that normal returns on financial investment is part of economic cost so that when firms break even, investors receive a normal return on their investment. g) How much cassava would farmers grow? h) At what price would cassava be sold in the free market? i) What would be the monetary cost of this agricultural program? j) If the program were implemented, what would Consumer Surplus be? How much money would consumers spend on cassava? What is the sum of these two monetary amounts? k) If the program were implemented, what would be the total cost of growing cassava? 1) Now add to the amount you found in part k) the monetary cost of the deficiency payment program you found in part i). Compare this sum to the one you found in part j). Should government go ahead with the program? Discuss