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

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

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 Redenbachers 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 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....
View Full Document

Page1 / 2

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online