Question

The following are the U.S. supply and demand schedules for wheat (in millions of bushels):

Price per Bushel	Quantity Demanded	Quantity Supplied
26	3	23
24	5	21
22	7	19
20	9	17
18	11	15
16	13	13
14	15	11
12	17	9
10	19	7
8	21	5
6	23	3

What is the equilibrium price? What is the equilibrium quantity?

Suppose instead that the government wished to raise farm income and decided to insure that the price per bushel did not fall below $24. Two plans are proposed. In Plan A, the government agrees to buy sufficient wheat to raise the price to $24. In Plan B, the government would announce that it would pay farmers a subsidy equal to the difference between $24 and the market price at the time the wheat is sold. Either plan would be announced before the farmers make their planting decisions.

Under Plan A, how many bushels would consumers buy; and what would be the total cost to the government? Under Plan B, how many bushels would consumers buy and what would be the total cost to the government?

Would farmers prefer Plan A or Plan B? (Explain your answers.)

c. Return to part a and ignore the situations in b.

Suppose that the quantity supplied part of the table above reflects the domestic supply of wheat, but that wheat can either be imported or exported at a price of $12. What will be the equilibrium price of wheat in the U.S., the equilibrium quantity of wheat consumed in the U.S., and the quantity produced domestically? What will be the total amount of imports or exports of wheat?

1A. Suppose that the bushels of wheat purchased by the government in Program A disappear and are never seen again. Draw the demand and supply curve diagram corresponding to the data in the table and show the effects of Program A. (Please use graph paper.) Carefully describe the changes in consumers’ surplus, producers’ surplus, and the“efficiency loss” caused by this program compared to no program at all. Be sure to label the relevant areas in your diagram. You do not need to calculate the efficiency losses quantitatively.

1B.Now we want to analyze Program B. Draw the demand and supply curve diagram corresponding to the data in the table and show the effects of Program B. (Please use graph paper.) Carefully describe the changes in consumers’ surplus, producers’ surplus, and the “efficiency loss” caused by this program compared to no program at all. Be sure to label the relevant areas in your diagram. You do not need to calculate the efficiency losses quantitatively.

1C. From society’s point of view, is Program A better than program B or is Program B better than program A? Explain your reasoning. (In answering this question, you should assume, as in 1A, that the bushels purchased by the government completely disappear forever.)

Answer 1

Cafter ss process 26 24 22 20 18 16 14 12 10 8 6 theta D 3 5 2 9 11 13 15 17 19 21 23 theta s 23 21 19 17 15 13 11 9 7 5 3 New theta_s Substudly of $ 8 15 13 11 9 7 5 3 1 a) Equilibrium Price = 16 & Qty = 13 b) Price below $ 24 not allowed Plan A, Excess demand at $ 24 = 21-5 = 16 units will be purchased by goat substudly = ($24-16) times = $ 8 plan B substudy of $ 8 Under plan A, 16 units will be purchased by goat & expn = 16 times 24 = 384 Under plan B,9 units are sold & consumed & goat exp = 9 times 8 = 72 c) Eqn price will be $ 2 comp = 16 prodn = 10 Import = 6