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a State University Extens... MSN.com - Hotmail, Outloo... MSN.com - Hotmail, Outloo... .f profile.php-id-1000081750.. Suggested The following calculator shows the market for orange juice. Use the graph that follows to help you answer the questions. The blue curve represents the demand curve, and the orange curve represents the supply curve Tool tip: Use your mouse to drag the green line on the graph. The values in the boxes of the calculator will change accordingly. You can also directly change the values in the boxes with the white background by clicking in the box and typing. The graph and any related values will change accordingly. Note that the calculator and graph are here to help you answer the questions that follow; you will not be graded on anything you do with therm PRICE [Dollars per gallon CALCULATOR Price Dollars per gallon) Quantity Demanded [Millions of gallons] Quantity Supplied [Millions of gallons] 70 Shortage [Millions of gallons] 70 Surplus Millions of gallons] 80 100 40 QUANTITY (Millions of gallonsl 20 60 Reset to Initial Values Calculate The market price of orange juice without government intervention is per gallon Consider legislation that doesn't allow the price of orange juice to be below $5 per gallon and stipulates that the government buy any surplus orange juice produced at that price. In order to raise the price to $5 per gallon, the government would need to buy gallons of orange juice, which would cost the government Suppose there are only a few orange growers who would benefit from this legislation and milions of consumers who would suffer through higher prices. This would mean that legislation imposing price supports at $5 per gallon: O Is competing-interest legislation, so it may or may not pass

Explanation / Answer

The market price of orange juice without government intervention(where demand and supply intersects) is $4 per gallon.

If legislation doesn't allow market price to fall $5 per gallon then it's a binding price floor, which prevents market from reaching equilibrium. This will lead to a surplus of orange juice, as at $5 per gallon, supply is 60 millions of gallons and demand is 30 millions of gallons. So, there is a surplus of (60 - 30 ) = 30 millions of gallons.

The government would need to buy this surplus amount of 30 millions of gallons and this would cost the government = cost of surplus in the market = ( price floor * surplus amount) = $(5 *30) million = $150 million.

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