Answer to Question #259146 in Microeconomics for Bilal

Question

The government wants to drive the price of soybean above the equilibrium price p1 to p2. It offers growers a payment of x to reduce their output from Q1 to Q2, which is the quantity demanded by consumers at p2. Show in a figure how large x must be for growers to reduce output to this level. What are the effects of this program on consumers farmers and total welfare? Compare this approach to (a) offering a price support at p2, (b) offering a price support and a quota set at Q1, and (c) offering a price support and a quora set at Q2.

Answer 1

This program has a negative impact on consumers. This is because their demand won't be satisfied and also it will be expensive for them to affordable the little that is supplied.

Farmers will not be affected because the payment that is offered to them is a form of compensation for the cut down in supply.

Total welfare is affected negatively. This is because the consumer will be the one suffering, because the key focus in the production process is the wellness of the consumer through provision of maximum satisfaction.