In economics, a price support may be either a subsidy or a price control, both w
ID: 1114606 • Letter: I
Question
In economics, a price support may be either a subsidy or a price control, both with the intended effect of keeping the market price of a good higher than the competitive equilibrium level. A subsidy is usually paid directly to the producer In the case of a price control, a price support is the minimum legal price a seller may charge, typically placed above equilibrium. It is the support of certain price levels at or above market values by the government. A price support scheme can also be an agreement set in order by the government, where the government agrees to purchase the surplus of at a minimum price. For example, if a price floor were set in place for agricultural wheat commodities, the government would be forced to purchase the resulting surplus from the wheat farmers (thereby subsidizing the farmers) and store or otherwise dispose of it. Higher prices can also be achieved through production controls such as acreage allotments, production quotas and cross compliance arrangements. Labeling convention for identifying and comparing areas on a graph. Example Consumer Surplus would be the area ABP. Comparison of areas on a graph to analyze relative values and changes in economic variables is utilized when the graph does not have a specified scale. Price Consumer Surplus Quantity CopyrightExplanation / Answer
(1)
Free market equilibrium is at point E where demand and supply curves intersect.
NOTE: As per Chegg answering guideline, first question is answered.
Area on Graph Calculated Value Free Market Price P0 $12 Free Market Quantity Q0 80 Producer revenue = Price x Quantity = 0P0EQ0 = $12 x 80 = $960 Producer Variable cost Minimum price (Vertical intercept of Supply curve) x Quantity = 0BCQ0 = $2 x 880 = $160 Producer surplus = Area between supply curve & Market price = BEP0 = (1/2) x $(12 - 2) x 80 = 40 x $10 = $400 Consumer expenditure = Price x Quantity = 0P0EQ0 = $12 x 80 = $960 Consumer Surplus = Area between demand curve & Market price = AEP0 = (1/2) x $(26 - 12) x 80 = 40 x $14 = $560