Price Controls and Quotas: End of Chapter Problems Price of corn (per bushel) .

Question

Price Controls and Quotas: End of Chapter Problems Price of corn (per bushel) . For the last 80 years, the U.S. government has used price supports to provide income assistance to American farmers. To implement these price supports, at times, the government has used price floors, which it maintains by buying up the surplus farm products, At other times, it has used target prices, a policy by which the government gives the farmer an amount equal to the difference between the market price and the target price for each unit sold. Consider the market for corn depicted in the accompanying diagram. b. Suppose the government sets a target price of S5 per bushel for any quantity supplied up to 1,000 bushels. How many bushels of corn are purchased by consumers and at what price? By the government? How much does the program cost the government? How much revenue do corn farmers receive? 800 1,000 1,200 Quantity of corn (bushels) How many bushels of corn are purchased by consumers? What price will consumers pay? How many bushels of corn are purchased by the government? bushels How much does the program cost the government? How much revenue do corn farmers receive?

Explanation / Answer

1) At a price of $5, the amount of bushels purchased by the consumer is equal to the demand made by consumers at the price of $5. Thus, consumers will purchase 800 bushels of corn.

2) Since the price target set by the govt. is $5, then the consumers will pay $5 for each bushel of corn.

3) The government will purchase the surplus created by setting the price floor where the surlus equals the difference in amount supplied at $5 and quantity demanded at $5. Thus the government will purchase 1200-800=400 bushels of corn.

4) The cost to the government equals the amount incurred by it on purchasing 400 bushels. Thus cost to the government is 400*5=$2000

5) Total revenue received by farmers = 1200*5=$6000

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