We are going to model the market for wheat sold for food use in the U.S....

Transcribed Image Text:

We are going to model the market for wheat sold for food use in the U.S. (Wheat can also be sold for export, sold for seed, and sold for stockpiling, but our simple model won't include these.) We can characterize the food market for wheat with the following Demand and Supply functions: Demand function: P=7-2Q Supply function: P=4+Q Where P is the farm price in $/bushel and Q is quantity in billions (1,000,000,000s) of bushels sold. 1. a. Graph the Demand and Supply curves for wheat and find the equilibrium price and quantity of wheat sold in this competitive market. You can solve graphically or algebraically as two equations with two unknowns. Show your calculations. P $10 ($/ bushel) $5- $0 0 1 2 (Billions of bushels) Q 3 b. Determine this market's size in terms of total amount of transactions (the total amount paid by consumers; which equals the total amount of revenues received by producers). Show the area on the graph that corresponds to the amount transacted in the market. c. Redraw the same supply and demand curves on a fresh graph (provided below). Also redraw the area on the graph that corresponds to the total amount of money transacted (thus the total amount of revenues received by producers). Now, using the supply curve, determine how much it cost producers to produce the quantity of wheat sold. Show your calculations. And show the area on the graph that corresponds to producer's costs. Finally, determine producers' surplus (which is producers' revenues minus their costs). Show the area on the graph that corresponds to producers' surplus. P $10 ($/ bushel) $5 $0 0 2 (Billions of bushels) Q P $10 ($/ bushel) $5- d. Redraw, one more time, the same supply and demand curves. And again, redraw the area on the graph that corresponds to the total amount of money transacted (thus also the total amount paid by consumers). This time, from the demand curve, determine consumers total valuation of or willingness to pay for the wheat that was purchased in the market. Show the area on the graph that corresponds to consumers' total valuation or willingness to pay for the wheat purchased. Finally, determine consumers' surplus (which is consumers' total willingness to pay minus the total amount they actually paid at market prices). Show your calculations and show the area on the graph that corresponds to consumer surplus. SO 0 (Billions of bushels) Q 2. List four general ways to shift Demand and briefly explain each. 3. 4. List four general ways to shift Supply and briefly explain each. Suppose that new water quality regulations have banned certain fungicides that are typically used to control wheat rust. This will increase the variable costs of producing wheat in the US by $2 a bushel, Will this shift Demand? If so, which way and by how much? Will this shift Supply? If so, which way and by how much? What is the new equilibrium price and quantity? Show your calculations. What effect will this have on producers? What effect will this have on consumers? P $10 ($/ bushel) 5. $5- $0 0 1 2 3 (Billions of bushels) Q Since the government chose to put a ban on the fungicide, there must be a market failure somewhere. What is it? We are going to model the market for wheat sold for food use in the U.S. (Wheat can also be sold for export, sold for seed, and sold for stockpiling, but our simple model won't include these.) We can characterize the food market for wheat with the following Demand and Supply functions: Demand function: P=7-2Q Supply function: P=4+Q Where P is the farm price in $/bushel and Q is quantity in billions (1,000,000,000s) of bushels sold. 1. a. Graph the Demand and Supply curves for wheat and find the equilibrium price and quantity of wheat sold in this competitive market. You can solve graphically or algebraically as two equations with two unknowns. Show your calculations. P $10 ($/ bushel) $5- $0 0 1 2 (Billions of bushels) Q 3 b. Determine this market's size in terms of total amount of transactions (the total amount paid by consumers; which equals the total amount of revenues received by producers). Show the area on the graph that corresponds to the amount transacted in the market. c. Redraw the same supply and demand curves on a fresh graph (provided below). Also redraw the area on the graph that corresponds to the total amount of money transacted (thus the total amount of revenues received by producers). Now, using the supply curve, determine how much it cost producers to produce the quantity of wheat sold. Show your calculations. And show the area on the graph that corresponds to producer's costs. Finally, determine producers' surplus (which is producers' revenues minus their costs). Show the area on the graph that corresponds to producers' surplus. P $10 ($/ bushel) $5 $0 0 2 (Billions of bushels) Q P $10 ($/ bushel) $5- d. Redraw, one more time, the same supply and demand curves. And again, redraw the area on the graph that corresponds to the total amount of money transacted (thus also the total amount paid by consumers). This time, from the demand curve, determine consumers total valuation of or willingness to pay for the wheat that was purchased in the market. Show the area on the graph that corresponds to consumers' total valuation or willingness to pay for the wheat purchased. Finally, determine consumers' surplus (which is consumers' total willingness to pay minus the total amount they actually paid at market prices). Show your calculations and show the area on the graph that corresponds to consumer surplus. SO 0 (Billions of bushels) Q 2. List four general ways to shift Demand and briefly explain each. 3. 4. List four general ways to shift Supply and briefly explain each. Suppose that new water quality regulations have banned certain fungicides that are typically used to control wheat rust. This will increase the variable costs of producing wheat in the US by $2 a bushel, Will this shift Demand? If so, which way and by how much? Will this shift Supply? If so, which way and by how much? What is the new equilibrium price and quantity? Show your calculations. What effect will this have on producers? What effect will this have on consumers? P $10 ($/ bushel) 5. $5- $0 0 1 2 3 (Billions of bushels) Q Since the government chose to put a ban on the fungicide, there must be a market failure somewhere. What is it?