Group+2+Price+Controls

=Week 2: Price Controls=

=** Assume that the demand and supply for corn are defined by the following equations: ** =

Q S = -1 + 2 P   Q D = 9 - ½ P   a. Provide a graph of the market for corn, making sure to label key points.


 * ** Price ** ||  ** QS **  ||  ** QD **  ||
 * $1.00 ||  1  ||  8.5  ||
 * $2.00 ||  3  ||  8  ||
 * $3.00 ||  5  ||  7.5  ||
 * $4.00 ||  7  ||  7  ||
 * $5.00 ||  9  ||  6.5  ||
 * $6.00 ||  11  ||  6  ||
 * $7.00 ||  13  ||  5.5  ||
 * $8.00 ||  15  ||  5  ||
 * $9.00 ||  17  ||  4.5  ||
 * $10.00 ||  19  ||  4  ||

b. What is the equilibrium price and quantity of corn in the market?

The answer is 4 $ the equilibrium price and the equilibrium quantity is 7.

c. Assume that the government sets a minimum price of $5.00 in the corn industry to ensure the survival of the family farmer. What is the effect on the market for corn (i.e. what is the new equilibrium price and quantity of)? Who benefits from the policy and who loses?

Should the government put in place a price floor of $5 on corn, there would be a surplus of corn in the market. Because the equilibrium price is $4, at a price of $5 the farmers would supply a greater amount of corn, but there would be less of a demand for it; this creates the surplus. This is therefore actually harmful to farmers, because some or most farmers would not be able to sell all of the corn that they produced.