Answer to Question #259623 in Microeconomics for Hini

Question

The government wants to drive the price of soybeans above the equilibrium price, P₁, to pr. It offers growers a payment of x to reduce their out put from Q₂ (the equilibrium level) ro Q₂, which is the quantity demanded by consumers at p. Show in a figure how larger 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 sup port of p,, (b offering a price support and a quota set at Q₁, and (c) offering a price support and a quota set at Q2.

Answer 1

Solution:

When a minimum price is set above the equilibrium price, it will result in a surplus in the market since the quantity supplied will exceed the quantity demanded. The quantity demanded will be in Q₁, while the quantity supplied will be in Q₁. Therefore, the growers will have to reduce their output from Q₂ to Q₁, which is the quantity demanded by consumers given the minimum price set.

 

This is depicted by the below graph:

 

a.). The minimum price (price support of p) will make the farmers better off since they will be able to sell their products at higher prices. Consumers will be worse off since they will have to pay a higher price for the exact same good. That is, consumers will pay more for a lower quantity. The minimum will cause a deadweight welfare loss and thus decrease the overall welfare.

 

b.). Offering price support and a quota set at Q₁, both the farmers and consumers will be worse off. Farmers will be forced to supply less quantity of their products in the market while consumers will pay higher prices for lower quantities. Overall welfare will decrease.

 

c.). Offering price support and a quota at Q₂, the farmers will be better off since they will be supplying more quantities at higher prices, while consumers will be worse off since they will be purchasing more products at higher prices. The overall welfare will decrease.