In recent years, the government of Pakistan has established a support price for

Question

In recent years, the government of Pakistan has established a support price for wheat of about $0.20 per kilogram of wheat. At this price, consumers are willing to purchase 10 billion kilograms of what per year, while Pakistani farmers are willing to grow and harvest 18 billion kilograms of wheat per year. The government purchases and stores all surplus wheat.

We know that

a. consumers buy 10 billion kilograms at the support price of $0.20 per kilogram and hence spend $2 billion on wheat

b. The amount of surplus wheat at the support price is 8 billion kilograms, so at the $0.20 per kilogrgram support price, the government must spend $1.6 billion to purchase this surplus wheat.

c. Pakistani wheat farmers receive a total of $3.6 billion for the wheat that they produce at the support price.

Using the above information suppose that the market clearing price of Pakistani wheat in the absence of price supports is equal to $0.10 per kilogram. At this price, the quantity of wheat dermanded is 12 billion kilograms. Under the government wheat price-support program, how much more is spent each year on wheat harvested in Pakistan than otherwise would have been spent in an unregulated market for Pakistani wheat?

Explanation / Answer

Pakistani wheat farmers get $2 billion from consumers, and $1.2 billion from the government (funded by taxpayers) who are consumers)), so the total amount spent on wheat is $3.2 billion a year under price support.
In an unregulated market, the farmers receive $0 from the government, and they get $.10/kg*12 billion kg=$1.2 billion

$3.2 billion-$1.2 billion = $2 billion more under price support

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