Question

Suppose the market supply and demand curves for wheat in the United States are as follows (prices are in dollars, quantities are in millions of bushels ) Ps=0.4QsPD=45−0.1QD​ where PS and QS are the supply price and quantity, and PD and QD are the demand price and quantity. The U.S. government is considering two altemative price support policies: policy A and policy B. Policy A: The government buys enough wheat so that a market price of $40.00 is maintained. Wheat bought by the government is stored, destroyed or given away abroad. Policy B: The government subsidizes wheat by SX per bushel and buys no wheat itself. L1a. (5 points) (i) How much wheat does the government buy, (ii) how much is domestically consumed, and (iii) what is the cost to the government of this policy? L1b. ( 5 points) (i)Calculate the subsidy needed if farmers are to receive $40 per bushel in the new equilibrium. Under this policy, (ii) how much wheat will consumers buy? (iii) How much will the government have to pay out?

Answer 1

The government's policy A involves buying excess wheat to maintain a market price of $40.00. The quantity bought by the government is 100 million bushels, and the domestically consumed quantity is 410 million bushels. The cost to the government is $2 million.

Step-by-step explanation:

The government's policy A aims to maintain a market price of $40.00 for wheat. To achieve this, the government will need to buy the excess quantity supplied to keep the price at the desired level. The quantity bought by the government can be calculated by equating the demand price ($40.00) to the supply curve, which yields a quantity of Qs=100 million bushels. This is the amount of wheat the government buys.

The domestically consumed quantity can be found by finding the quantity demanded at the price of $40.00, which is given by the demand curve, Qd=410 million bushels. Therefore, the domestically consumed quantity is 410 million bushels.

The cost to the government can be calculated by multiplying the quantity bought by the cost difference between the equilibrium price and the price at which the government supports the market ($40.00). In this case, the cost to the government would be $2 million (100 million bushels x ($45-$40)).