The market for rice has the following supply and demand schedules: To support ri

Question

The market for rice has the following supply and demand schedules:

To support rice producers, the government imposes a price floor of $50 per ton.

What quantity will be traded in the market? Why?

What steps might the government have to take to enforce the price floor?

2. (10 points)

Situation: Three Guys Named Moe, a moving company in Econopolis, is contemplating a price hike. Right now, they charge $20 per hour, but Moe #1 thinks they could get $30. Moe #2 disagrees, saying it will hurt the business. Moe #3, the brains of the outfit, has calculated the price elasticity of demand for their moving services in the range from $20 to $30 and found it to be 0.5. What will be the impact of a price increase on the company’s Total Revenue?

Should they do as Moe#1 suggests and raise the price? Why or why not?

Currently, Three Guys is the only moving company in Econopolis. Moe reads in the paper that several new movers are planning to set up shop there within the next year. After these competing firms move into Econopolis, is the demand for Three Guys’ services likely to be more elastic, less elastic, or the same? Why?

Explanation / Answer

*Multiple questions. Please post other question separately.

At a price floor of $50 per ton, producers sell 60 tons while buyers purchase only 40 tons. In effect, 20 tons of rice is wasted since supply exceeds the demand at this price.

To enforce this, the govt must buy the surplus quantity of 20 tons of rice. If the government does not do this, then the price of rice might crash as there will be surplus rice in the market. Alternatively, producers must throw away excess rice. The government can also subsidize the consumption of rice to make sure that excess rice is bought.

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