Microeconomics A Contemporary Intro
10th Edition
ISBN: 9781285635101
Author: MCEACHERN
Publisher: Cengage
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Government farm programs are very controversial since they are designed to assist only the farmers. But many analysts claim that farm programs are examples of binding price floor and serve only few. According to these analysts, these programs costs trillions of dollars and make households bear higher prices at the groceries and high taxes to finance the surplus caused the farm price controls. Therefore, they cause a deadweight loss to society.
Do you think that the government should end the farm subsidy programs? Identify the pros and cons of your propositions. Also, consider the political, social and economic aspects of the issue.
Suppose that the government has been supporting the price of corn. Its free market price is $2.50 per bushel, but the government has been setting a support price of $3.50 per bushel. Which of the following are ways that the government might try to reduce the size of the corn surplus? (Select one or more answers from the choices shown.) a. Decrease the support price. b. Institute an acreage allotment program. c. Decrease demand by taxing purchases of corn. d. Raise the support price.
Governments often attempt to boost the income of some agricultural producers with a variety of policies. We will discuss this in depth later in the course, but two approaches often discussed in introductory economics courses are quotas and production subsidies. Using basic supply and demand analysis, discuss how these policies work with emphasis on their similarities and differences. Does the elasticity of demand matter when comparing the policies?
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- This exercise is to help you understand the impact of different policies on consumer surplus (CS), producer surplus (PS), and total surplus (TS). a. Please draw a supply and demand diagram in a competitive market. Label the x-axis and y-axis. Identify the CS, PS and TS. b. [price control] Suppose now government sets a binding price ceiling (maximum price), draw a supply and demand diagram and show the change in CS, PS, TS, and deadweight loss(DWL). Whose surplus does the government try to improve? Does the policy achieve this goal? Why? c. [price control] Suppose now government sets a binding price floor (minimum price), draw a supply and demand diagram and show the change in CS, PS, TS, and deadweight loss (DWL). Whose surplus does the government try to improve? Does the policy achieve this goal? Why?arrow_forwardThe market for piano lessons is as follows: Demand: Q = 80 – 2P Supply: Q = 3P Draw the supply curve, demand curve, and solve for equilibrium (tax-free) price and quantity. Solve the consumer surplus and producer surplus. Impose a tax of $5 per lesson. Solve the new price paid by the consumer, price received by the seller, the quantity now sold, and total tax revenue collected by the government. Impose a tax of $10 per lesson. Solve the new price paid by the consumer, price received by the seller, the quantity now sold, and total tax revenue collected by the government. Impose a tax of $20 per lesson. Solve the new price paid by the consumer, price received by the seller, the quantity now sold, and total tax revenue collected by the government. Draw Arthur Laffer’s curve for parts A, B, C and D. Use the solved numbers from parts A, B, C, and D on this diagram. ANSWER 1 TO 5 ALLarrow_forwardTrue, False or Depends. Please develop your answers 1. "Who pays the costs of a tax will depend mainly on the will of the legislators, as they decide whether to tax the suppliers or the demanders of the good". 2. "The sunk efficiency loss generated by a tax is higher with relatively elastic supply and relatively inelastic demand compared to the reverse situation (relatively inelastic supply and relatively elastic demand)".arrow_forward
- Suppose the government introduces a price cap on energy which is below the equilibrium price of energy and therefore effective. In a carefully labelled diagram, illustrate the demand and supply function, the consumer and producer surplus, the (total) deadweight loss and the deadweight loss attributable to consumers and attributable to producers. Illustrate the quantity demanded, quantity supplied and the quantity that is traded. Is there a shortage or over-supply? Explain.arrow_forwardThe market for piano lessons is as follows: Demand: Q = 80 – 2P Supply: Q = 3P Draw the supply curve, demand curve and solve for equilibrium (tax free) price and quantity. Solve the consumer surplus and producer surplus. Impose a tax of $5 per lesson. Solve the new price paid by the consumer, price received by the seller, the quantity now sold, and total tax revenue collected by the government. Impose a tax of $10 per lesson. Solve the new price paid by the consumer, price received by the seller, the quantity now sold, and total tax revenue collected by the government. Impose a tax of $20 per lesson. Solve the new price paid by the consumer, price received by the seller, the quantity now sold, and total tax revenue collected by the government. Draw Arthur Laffer’s curve for parts A, B, C and D. Use the solved numbers from parts A, B, C and D on this diagram.arrow_forwardThe market demand and supply functions for potatoes are: QD = 2,000 - 500P and QS = 800 + 100P. To help potato producers, the government is considering legislation that would put a price floor at $2.25 per bag. If this price floor is implemented, determine (i) how many bags of potatoes will the government be forced to buy to keep the price at $2.25; (ii) how much government will spend in total; and (iii) how much producer- and consumer -surplus changes.arrow_forward
- How will the imposition of the chosen government policy impact consumer surplus, producer surplus and total surplus in this scenarioarrow_forward(3) Analyze the following statement: Federal farm price supports can never achieve their goals because the above equilibrium price floors that are established by the Ministry of Agriculture invariably create surpluses, which in turn drive prices back down to their original equilibrium.arrow_forwardSubsidies: Definition Explain why governments provide subsidies. Draw a diagram to show a subsidy, and analyze the impacts of a subsidy on market outcomes. Discuss the consequences of providing a subsidy on the stakeholders in a market, including consumers, producers and the government (EVALUATE). Calculate the effects on markets and stakeholders of subsidiesarrow_forward
- Consider the following market. Demand is given by Qd= 5- P where Qd is the quantity demand and P is the price. Supply is given by Qs = P/2 where Qs is the quantity supplied. a. What is the market equilibrium quantity and price? b Calculate consumer, producer and total surplus c. Suppose the government imposes a price floor of P = 4. Calculate the consumer surplus, producer surplus, and deadweight loss.arrow_forwardDiscuss and provide two examples of how subsidies can be economically harmful.arrow_forwardWhich of these is one effect of government price supports in the agriculture industry? The supply of agricultural goods is reduced relative to consumer demand. There is a greater competition from foreign agricultural suppliers. The price of agricultural goods is lower for consumers. There is a greater efficiency in the use of farmland by agricultural producersarrow_forward
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