Market Efficiency Problem

Consider the market for corn in the United States. We are going to use Excel to examine changes in consumer and producer surplus in a competitive market when the market is not in equilibrium. Suppose the demand and supply functions for corn are as follows.

QD =

100

-

14.5

P

QS =

0

+

5.5

P

Where Q is bushels of corn (in billions) and P is the market price per bushel. Using the template provided, enter the coefficients for demand and supply. When the market isn't in equilibrium, only the minimum of QD and QS values will actually be sold. Once you have this set up, answer the following questions.

MARKET DEMAND

MARKET SUPPLY

Coefficients

Coefficients

Intercept

Intercept

Price

Price

a)

Start at a price of $3 per bushel and increase the price to $6 in $.50 increments. What are the equilibrium price and quantity?

Price

Quantity demanded (billions)

Quantity supplied (billions)

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

Equilibrium price =

Equilibrium quantity =

billion bushels

b)

What happens to consumer, producer, and total surplus as you increase the price from $3 to the equilibrium?

Start price =

$3.00

Market quantity =

billion bushels

Consumer surplus

from

billion

to

billion.

Producer surplus

from

billion

to

billion.

Total surplus

from

billion

to

billion.

c)

Now increase the price from the equilibrium by $.25 two times. What happens to the market quantity, consumer, producer, and total surplus as you increase the price to a level higher than the equilibrium?

Price increment =

$0.25

Price

QD (billions)

QS (billions)

Q (billions)

CS (billions)

PS (billions)

TS (billions)

Consumer surplus

and producer surplus

The market quantity

and total surplus

d)

Explain the effect of changing the price away from the equilibrium on the market efficiency.

The further away from the equilibrium,

the total surplus in the market meaning

the dead-weight loss.