Consider the market for soybeans. The market demand curve is give by P = 18-4Q,
ID: 1133736 • Letter: C
Question
Consider the market for soybeans. The market demand curve is give by P = 18-4Q, where P is the price of soybeans (in dollars per bushel) and Q is the number of bushles supplied (in millions) The market supply curve is given by P=4+3Q.
1. What is the lowest price at which a producer would be willing to sell one more bushel of soybeans?
2.What is the highest price at which a buyerwould be willing to pay for one more bushel of soybeans?
Now suppose that the government decides that farmers can't make a living selling their soybeans at the amrket equilibrium price, so it passes a law "price floor) prohibiting any sales of soybeans at prices below $12 per bushel.
1. After the price floor, how many bushel of soybeans will actually be sold?
2. After the price floor, at the new market output, what is the lowest price at which a producer would be willing to sell one more bushel of soybeans?
3. After the price floor, at the new market output, what is the highest price at which a buyerwould be willing to pay for one more bushel of soybeans?
Explanation / Answer
Market demand curve is given by P = 18-4Q and the market supply curve is given by P=4+3Q. From the demand and supply curves we find that the market price is
18 – 4Q = 4 + 3Q
14 = 7Q
Q = 2, P = 18 – 4*2 = $10.
1. From the equilibrium, this price is $10 per bushel. This is so because only at the market price, the seller can sell one more bushel.
2. For the same reason, this price is $10 per bushel.
Government passes a law of a price floor prohibiting any sales of soybeans at prices below $12 per bushel. Hence price floor is binding because market price is less than price floor.
1. After the price floor, a total of 12 = 18 – 4Q or Q = 6/4 = 1.50 bushel of soybeans will actually be sold
2. After the price floor, at the new market output, the lowest price at which a producer would be willing to sell one more bushel of soybeans is $12.
3. After the price floor, at the new market output, the highest price at which a buyer would be willing to pay for one more bushel of soybeans is $12 because this is the price floor, the minimum price he should pay.