Problem Set 2 Solutions - (10 points) Ethanol D Supply of...

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Economics 304K: Spring 2008 Helen Schneider Problem Set 2 Solutions 1. a. Price floor of $300 is binding and will result in the surplus of 4 million tons of corn per year. Government would have to buy the entire amount of the surplus, 4 million tons/year. Only 2 million tons of corn will be sold in the market per year. b. A binding price floor in the corn market will decrease supply of ethanol by increasing input prices. c. Supply will decrease decreasing the surplus as the market price approaches $300/unit. d. Price ceiling of $300 is not binding. Equilibrium quantity of corn will be sold (4 million tons per year) and there will be no shortage or surplus. (40 points, 10, 10, 10, 10) 2. False, surplus of labor will exist.
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Unformatted text preview: (10 points) Ethanol D Supply of ethanol decreases, price goes up and quantity goes down. P S S 1 Corn S D If crops are destroyed, supply will shift to the left and the surplus will decrease to Q-2 or will be completely eliminated depending on the magnitude of the shift. Price floor=$300 6 2 200 4 P S Q 300 Employment L S Minimum wage=$7.25 5.00 L* wage 7.25 L D Q S Q D 1 3. a. $6 b. $3 c. $2 d. $1 e. $8 f. $5 g. As a result of the tax, the level of market activity has fallen, from 60 units being bought and sold to only 50 units being bought and sold. (35 points, 5 points each) 4. (15 points) Quantity of Marshmallows D P 6 10 1 2 2...
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Problem Set 2 Solutions - (10 points) Ethanol D Supply of...

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