Suppose the monthly market for an agricultural commodity is characterized by the following equations: QS =–35+35P...

Suppose the monthly market for an agricultural commodity is characterized by the following equations: QS =–35+35P QD =100–10P

(a) where QS and QD are quantities in units and P is the price per unit. Graph the supply and demand curves. Be sure to calculate the P and Q intercepts for demand and the P intercept for supply. Calculate and illustrate the equilibrium price and quantity. [Hint: Show your work.

(b) Calculate both the demand and supply elasticity around the equilibrium point. [Hint: you can use either the point method or the average arc (midpoint) method.

(c) Would the entry of new producers increase or decrease total spending on the good? Explain with reference to your answer from part (b). Would the entry of new demanders lead to an increase or decrease in total revenue to producers?

(d) Suppose the government institutes a supply management program that restricts the quantity to 60. It enforces this by granting quotas for 60 units of output to existing producers. What is the new price and quantity traded? Does this policy create deadweight loss (DWL) in the market? Briefly explain and identify any DWL in your diagram.

(e) What is the value of a unit of quota? Illustrate in your diagram. What is the total value of all units of the quota?

Expert Solution

Rahul Sunny answered 1 year ago

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