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Case Study: The following information applies to the following two questions. Suppose the market equilibrium price for tomatoes grown in the EU is Euro 6/ton. In the short run, the market supply of tomatoes is given by QS = 600,000 where QS is the tons of tomatoes supplied (i.e., farmers cannot change the supply of tomatoes if prices increase as the decision to grow tomatoes was made the year before). Farmers are, however, not satisfied with the Euro 6/ton price and negotiate a price floor of Euro 8/ton. Suppose the demand for tomatoes grown in the EU equals QD = 1,200,000 - 100,000P.
Questions:
a. Suppose that other than setting the price floor, the EU government does not interfere in the market. How much more/less revenue will farmers earn as a result of the price floor?
b. Suppose now that the EU also designs a program in which it commits to purchase all the tomatoes at (Euro 8/ton) that the farmers have grown but could not sell on the market at the Euro 8 price floor. The EU then dumps these tomatoes in the sea. How much does this program cost the EU (excluding logistical and transportation costs)?
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