Problem Set 3: Market Interventions 1. Suppose the market for corn...

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Problem Set 3: Market Interventions
1. Suppose the market for corn in Banana Republic is competitive. The market demand function for corn is Q ͩ = 10 − 0.5P and the market supply function is Q⁸ = P − 2, both measured in billions of bushels per year.

(a) What are the equilibrium price and quantity?
(b) Suppose the government imposes an specific tax of $6 per unit to raise government revenues. What will the new equilibrium quantity be? What price will buyers pay? What price will sellers receive? Analyze the
(c) At the equilibrium in part (b), what is consumer surplus? producer surplus? the government tax revenue? dead weight loss? Analyze the problem by shifting the demand curve, and show all of these numerically and graphically.
(d) Suppose the government imposes a price floor of $10 per bushel.What will the new equilibrium quantity be? What is consumer surplus? producer surplus? dead weight loss? Show all of these numerically and graphically.
(e) Suppose the government imposes a price ceiling of $6 per bushel.What will the new equilibrium quantity be? What is consumer surplus? producer surplus?dead
weight loss? Show all of these numerically and graphically.

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1.
(a) What are the equilibrium price and quantity?
When Qd =Qs we have the equilibrium
10-0.5P = P-2
10+2 = P+0.5P
1.5P = 12
P= 8
Q= 10- 0.5(8) = 10-4 = 6
Equilibrium price = 8 and equilibrium quantity = 6...

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