You are deciding to run for President of the United States. In order to win the...

You are deciding to run for President of the United States. In order to win the nomination of your party it is important to win the Iowa primary. Corn is a very important crop to Iowan’s, so you decide to offer to pay a subsidy for production of corn. The current price of a bushel of corn is $4. Last year the U.S. consumed 13 billion bushels. The price elasticity of demand for corn is 1.2 and the price elasticity of supply is 0 in the short run and infinite in the long run. Your great idea is to pay a $1 per bushel to any farmer that produces corn.

In the short run, what will be the new price that demanders pay for corn? (2)

In the short run, what will be the resulting amount that suppliers receive in total from selling a bushel of corn (the amount demanders pay plus the subsidy)? (2)

As a result, what happens to the producer surplus of corn farmers? (2)

What will be the cost to the government? (2)

In the long run, what will be the price that demanders pay for corn? (2)

In the long run, what will be the resulting amount that suppliers receive in total from selling a bushel of corn. (2)

As a result, what will happen to the producer surplus of corn farmers? (2)

What will be the equilibrium, long run, amount of corn in the market? (2)

Solutions

Expert Solution

a) Since supply is perfectly inelastic in the short run , the supply function will not shift due to subsidy being provided. Demanders will continue to keep paying the same price level i.e $4 per bushel

b) Suppliers on the other hand will get the full benefir by getting price paid by consumers + subsiy per bushel i.e $4 + $1 = $5 per bushel

c) Producer surplus of farmers will increase

d) Cost to the government = 1 x 13 million = $13 million

e) In the long run , as producers will get $1 subsidy and supply is perfectly elastic , they will increase supply which will bring all the benefit to the consumers and price consumers pay will come down to $3

f) Producers will keep on getting $4 per bushel ($3 consumers pay + $1 of subsidy)

g) Producers surplus in the long run will remain 0 , as in the long run producers get 0 profit.

Rahul Sunny answered 10 months ago

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