HW 4 answers - Economics 101-300 Winter 2006 Homework...

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Economics 101-300 Winter, 2006 Homework Problem Set # 4 Problems: 1) The above graph shows the market for wheat. Initially the market was at equilibrium at price = $4 and quantity = 96 bushels. The government then imposes a price floor at $6 and promises to buy the entire surplus from the farmers. What is the amount of payment the government will make to the farmers? What is the amount traded in the market? How much revenue will firms make? What will be consumers’ expenditures? Answer: The government will buy the entire surplus which is the difference between the quantity supplied (144) and the quantity demanded (64) at $6 per bushel. Thus the government’s payments are $6 x 80 = $480 The amount traded in the market is the lower of the quantity supplied and quantity demanded (as suppliers can’t trade more than demanders are willing to buy). So the answer is 64 bushels are traded in the market. The firms will be selling their entire supply to either the government or demanders, so the revenue they will receive is their supply times their price, or 144 x $6 = $864 Consumers will buy the entire quantity demanded at the price floor, so consumers spend 64 x $6 = $384 2) Here is an example of how a topic addressed in the previous question might be presented as a multiple choice problem: Due to the Atkins craze, people are not eating enough carbs. In an effort to make high-carb products more appealing, the government introduces a price ceiling at $2/ bushel of wheat, hoping that this lower price would increase the quantity demanded. What the government forgot is that at this lower price, farmers are less willing to supply wheat. What is the gain in consumer surplus when compared to the original equilibrium situation? a) $288 Supply Demand Price Floor Price Ceiling 6 2 48 64 96 144 160 This graph relates to problems #1-2 Price Quantity (Bushels) 4 10 7
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b) $312 c) -$24 d) $0 e) $24 Answer: e. Take the consumer surplus in pieces: At equilibrium price, CS = (6*96)/2 = $288.
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