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    Estimated yearly cost to the government

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    1. Suppose the government wishes to spur the production of peanuts for their potential usage in making biodiesel in order to reduce our dependence on foreign oil. Further suppose that the market demand and supply for soybean oil are given by QD = 100 - P and QS = 50 + .3P, where Q = barrels of peanut oil, and P = price per barrel.
    a. What is the equilibrium price in this market with no government intervention? Show your work.

    b. What is the equilibrium quantity in this market? Show your work.

    c. Suppose the government decides to create a strategic reserve of peanut oil to increase overall demand, raise the price of peanut oil, and encourage more peanut production. To create the reserve, assume the government buys 10 units of peanut oil each year. What is the new equilibrium price and quantity of peanut oil? Explain and show your calculations.

    d. What is the estimated yearly cost to the government of this program? Explain.

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    Solution Summary

    Estimated yearly cost to the government is obtained.

    $2.49

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