As the chapter explains, some government agricultural policies involve price controls. Other agricultural policies, however, involve quantity controls.
a. The equilibrium price of wheat is $5 and the equilibrium quantity is 100. Draw a supply and demand diagram that shows the equilibrium in the wheat market.
b. Suppose the government institutes a policy that prohibits wheat farmers from growing more than 80 bushels of wheat in total. How would this policy change the supply curve for wheat?
c. Use your supply and demand diagram to show that the government policy in part (b) would raise the equilibrium price and lower the equilibrium quantity of wheat.
d. Show that the policy in part (b) will lead to a deadweight loss in the wheat market.