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Suppose the demand function for corn is = 10 2 and supply function is = 3 5. The government is concerned that the market equilibrium
Suppose the demand function for corn is = 10 2 and supply function is = 3 5. The government is concerned that the market equilibrium price of corn is too low and would like to implement a price support policy to protect the farmers. By implementing the price support policy, the government sets a support price and purchases the extra supply at the support price. In this case, the government sets the support price S = 4 . a)Compute the original market price and quantity in absence of the price support policy. b)At the support price S = 4 , find the quantity supplied by the farmers, the quantity demanded by the market, and the quantity purchased by the government. c)Draw a diagram to show the change in the producer surplus due to the implementation of the price support policy. Calculate the change in the producer surplus. d)Draw a diagram to show the change in the consumer surplus due to the implementation of the price support policy. Calculate the change in the consumer surplus. e)Calculate the cost to the government to implement the price support policy. Draw a diagram to show the government cost. f)Suppose now the government switches from price support policy to subsidy policy. For each unit of corn produced, the government subsidizes the farmer B =5/3, where B is the per unit subsidy. Find the new equilibrium price under this subsidy policy. How much money will the government have to spend in order to implement this subsidy policy?
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