Suppose that the demand curve for corn is downward-sloping but that the supply curve is perfectly price inelastic at a quantity of Q* once the corn is harvested. Furthermore, assume that the equilibrium price is $ 5 per bushel.
a. If the U.S. government decides to enter the market for corn and purchase enough so that the price doubles to $ 10 per bushel (assume that the corn is given away to Russia), indicate on a supply–demand diagram the amount spent on corn by private American consumers and the amount spent on corn by the U.S. government. If the demand for corn by private American consumers is price inelastic (suppose that demand elasticity is equal to 0.5), which amount is larger—that spent by the government or that spent by private consumers? Explain your answer.
b. An alternative method for helping corn farmers is to have the government pay them a subsidy of $ 5 per bushel of corn. Show graphically the amount spent on corn by private consumers under this proposal as well as the amount spent by the U.S. government. Again assuming that the demand elasticity for corn is 0.5, is the cost to the government of the subsidy program greater or less than the cost of the program described in part a? Explain your answer.

  • CreatedNovember 14, 2014
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