Suppose the demand function for corn is

= 10 2

and supply function is

= 3 5.

The government is concerned that the market equilibrium price of corn is too low and would like to implement a price support policy to protect the farmers. By implementing the price support policy, the government sets a support price and purchases the extra supply at the support price. In this case, the government sets the support price S = 4 .

a) Compute the original market price and quantity in absence of the price support policy.

[8 marks]

b) At the support price S = 4 , find the quantity supplied by the farmers, the quantity demanded by the market, and the quantity purchased by the government.

[8 marks]

c) Draw a diagram to show the change in the producer surplus due to the implementation of the price support policy. Calculate the change in the producer surplus.

[8 marks]

d) Draw a diagram to show the change in the consumer surplus due to the implementation of the price support policy. Calculate the change in the consumer surplus.

[8 marks]

e) Calculate the cost to the government to implement the price support policy. Draw a diagram to show the government cost.

[8 marks]

f) Suppose now the government switches from price support policy to subsidy policy. For each unit of corn produced, the government subsidizes the farmer B =5/3, where B is the per unit subsidy. Find the new equilibrium price under this subsidy policy. How much money will the government have to spend in order to implement this subsidy policy?

[5 marks]