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.

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.

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.

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.

e) Calculate the cost to the government to implement the price support policy.

Draw a diagram to show the government cost.