Answer to Question #37968 in Microeconomics for florence

Question

The demand and supply functions of wheat in Central Rift is;
P=100-Q
P=10+0.5Q
the government decides to help the central rift farmers by purchasing wheat on the open market to keep its price higher than equilibrium. The target price the government is aiming for(and achieves)is sh80.
a.) Derive the new demand because of this policy to keep the price of wheat high and graphically show the pld and new equilibrium.
b.) Determine the societal welfare effect of this policy of purchasing wheat on the open market in order to keep its price higher than equilibrium.
c.)Now imagine that the government changes its mind and wants to keep the price at this elevated level, but it will achieve this by paying farmers not to grow wheat. Derive the new supply function because of this policy and graphically show the old and new equilibrium.
d.) assuming that the policy c.) above works, how much would the government have to pay the farmers in total to encourage them to sufficiently reduce their production of wheat?
e.)determine the societal welfare effect of this policy of paying farmers not to grow wheat but keeping its price higher than equilibrium.

Answer 1

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