markets2a

# markets2a - 2(b If the price floor is imposed at a price of...

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Additional Problem 2 : Market Analysis (Answer Key) During the fall growing season Mr. Redenbacher, a farmer, expects the supply relationship for corn to be Q = 500 bushels. Based on demand information from previous seasons and his economic wisdom, Farmer Redenbacher postulates that demand for his corn can be described as P = 150 - 1/5Q, where P is the demand price per bushel of corn. (a) Using graphical and quantitative analysis explain the price that farmer Redenbacher will charge so as to sell all of his corn. Demand : P D = 150 - 1/5 Q D Supply : Q S = 500 P S \$150 Î Surplus created by p r i c e c o n t r o l P C = \$60 P E = \$50 D Q 0 450 500 750 Q E = Q D = Q S In equilibrium : Q E = Q D = Q S P D = 150 - 1/5 Q D = 150 - 1/5 (500) = 150 - 100 P E = 50 Note : When Q D = 0 P D = 150 Î P D = 150 - 1/5 (0) When P D = 0 Q D = 750 Î 0 = 150 - 1/5 Q D -150 = -1/5 Q D 750 = Q D Equilibrium price and quantity are \$50 and 500.

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Unformatted text preview: 2 (b) If the price floor is imposed at a price of \$60 per bushel , explain, with as much detail as possible, the effects this control will have on Farmer Redenbacher’s enterprise and anyone who is affected by this control. P C = \$60, a price floor Since P D = 150 - 1/5 Q D \$60 = 150 - 1/5 Q D-90 = -1/5 Q D 450 = Q D Î amount purchased at P C . Results of price floor : 1. P increase by \$10, from \$50 to \$60 2. Q D decreases by 50 units, from 500 to 450 3. At P C a surplus of 50 units exists Before PC TE = TR = P E x Q E = \$50 x 500 = \$25,000 After PC TE = TR = P C x Q D = \$60 x 450 = \$27,000 If the government purchases the surplus at the price floor of \$60, the farmers’ TR would be = P C x 500 = \$60 x 500 = \$30,000....
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markets2a - 2(b If the price floor is imposed at a price of...

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