Reference no: EM133659625

Problem

The market demand-and-supply functions of oranges are given below. Q refers to millions of pounds of oranges/month, and p is the price per pound (cents).

Demand: p = 220 - 6Q
Supply: p = 120 + 4Q

1. What is the market equilibrium quantity and price of oranges?

2. Suppose the government subsidizes 25 cents/pound to orange consumers. What is the new equilibrium quantity and price? (Hint: write down the new supply or demand function first)

3. At the new equilibrium, what is the price that consumers pay? What is the price that farmers receive?

4. What is the percentage of subsidy that consumers receive? What is the percentage of subsidy that is pass-through to farmers?

5. Plot all the supply and demand curves in the same graph of (Q, p) space. Label your horizontal and vertical axis properly. Indicate the direction and the magnitude of shift of any curves. Label the initial and new equilibriums (i.e., e1, e2), and their respective price and quantity you found from (a) and (b).

6. How many million dollars of subsidy that the government gives to farmers? (You should use the information provided in Part (2); total subsidy = unit subsidy * quantity sold)

7. Suppose the government subsidizes 25 cents/pound to orange farmers instead. Repeat the analysis above and show how your answers change in (2), (3), (4) and (5), respectively.