Question

Price per kilo

(Dollars)

$2 40,000 4 34,000 6 28,000 8 24,000 10 20,000 12 18,000 14 12,000 16 6,000

Quantity Quantity demanded supplied (kilos) (kilos)

0 4,000 8,000 16,000 20,000 28,000 36,000 40,000

4. Refer to Table 1-3, which contains information about the corn market. An agricultural price floor is a price that the government guarantees farmers will receive for a particular crop. Suppose the federal government sets a price floor for corn at $12 per kilo.

a. What is the amount of shortage or surplus in the corn market as result of the price floor?

b. If the government agrees to purchase any surplus output at $12, how much will it cost the government?

c. If the government buys all of the farmers' output at the floor price, how many kilos of corn will it have to purchase and how much will it cost the government?

d. Suppose the government buys up all of the farmers' output at the floor price and then sells the output to consumers at whatever price it can get. Under this scheme, what is the price at which the government will be able to sell off all of the output it had purchased from farmers? What is the revenue received from the government's sale?

e. In this problem we have considered two government schemes: (1) a price floor is established and the government purchases any excess output and (2) the government buys all the farmers' output at the floor price and resells at whatever price it can get. Which scheme will taxpayers prefer?

f. Consider again the two schemes. Which scheme will the farmers prefer?

g. Consider again the two schemes. Which scheme will corn buyers prefer?

Answer 1