Reference no: EM133240887

1. In your awesome job as economic advisor to POTUS (President of the USA) you have been assigned to deal with the politics of food policy. The President is up for re-election in a year and wants to make fresh foods (i.e. fruits, vegetables, meats and fish), which are popular among voters, more affordable. Suppose the demand for fresh food is a function of the price of fresh food, P, and the price of frozen substitutes such frozen vegetables and fruits and frozen meat and fish. Po. The supply of fresh food is a function only of the price of fresh foods, P.

(a) Suppose that the federal government sells frozen foods in outlets throughout the country at the price, ?? and fresh foods are sold in private markets. The President wants to know how the market equilibrium price and quantity of fresh food, P* and Q*, will be impacted if the government cuts its price of frozen foods. Using a diagram for the market for fresh foods, explain how this policy could help the President get re-elected.

(b) The President is concerned that your analysis is too simplistic because it uses simple, linear supply and demand pictures. To impress POTUS, use calculus, and the most general forms of the demand and supply functions (Qd=D(P, P) & Qs=S(P)), to show that your predictions for equilibrium price do not o depend on linearity, but only assumptions about the slopes of demand and supply being negative and positive, respectively (for all prices).