10. The government has implemented a new policy to support the price of chickpeas at $12.81/cwt....

10. The government has implemented a new policy to support the price of chickpeas at $12.81/cwt. (A cwt means “hundred weight” or 100 pounds but that is not important for the answer). If the chickpeas market equilibrium price is $10.55/cwt, the equilibrium quantity of chickpeas is 69.432 million cwt, the elasticity of supply is 0.25, and the elasticity of demand is -0.75, then what is the new quantity supplied and the new quantity demanded of chickpeas at the support price? How much chickpeas would the government need to buy to keep the price supported at $12.81/cwt?

Solutions

Expert Solution

Price Floor = $ 12.81

Equilibrium price, P= $ 10.55

Equilibrium Quantity, Q = 69.432 million

Elasticity of demand = -0.75

Elasticity of supply = 0.25

First elasticity of demand

-0.75Q₂ - 52.074 = 10.33628Q₂ - 717.6688

717.6688 - 52.074 =( 0.75 + 10.33628)Q₂

665.5948 = 11.08628 Q₂

Quantity Demanded after price floor = 62.87 million units

Quantity Supplied

Quantity Supplied after price floor = 72.87 million units

Government will have to buy = 72.87 - 62.87 = 10 million units

Please contact if having any query thank you.

Rahul Sunny answered 1 year ago

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