The Analysis of Competitive Markets

Problem 1
The government is attempting to support the alfalfa market price. The market for alfalfa
is described in the following figure:
graph in attachment
(a) If the government purchases enough alfalfa to raise the price from $50/ton to
$75/ton, what is the government cost? What is the gain/loss in surplus to the
producers and the consumers?
(b) If the government raises the price to $75/ton, by how much producers surplus
will increase?
Problem 2
Japanese rice producers have extremely high production costs, due in part to the high
opportunity cost of land and of their inability to take advantage of economies of largescale
production. Analyze two policies intended to maintain Japanese rice production:
(a) per pound subsidy to farmers for each pound of rice produced, (b) price support for
production of rice. Illustrate with supply and demand diagrams the equilibrium price and
quantity, domestic price production, government revenue or deficit, and dead weight loss
from each policy.
75
50
30
25 20 16
S
D
Problem 3
The United States currently imports all of its coffee. The annual demand for coffee by
U.S. consumers is given by the demand curve Q=250-10p, where Q is quantity (in
millions of pounds) and p is the market price per pound of coffee. World producers can
harvest and ship coffee to U.S. distributors at a constant marginal (average) cost of $8 per
pound. U.S. distributors can in return distribute coffee for a constant $2 per pound. The
U.S. coffee market is competitive. Congress is considering a tariff on coffee imports of
$2 per pound.
(a) If there is no tariff, how much do consumers pay for a pound of coffee? What is
the quantity demanded?
(b) If the tariff is imposed, how much will consumers pay for a pound of coffee?
What is the quantity demanded?
(c) Calculate the lost consumer surplus.
(d) Calculate the tax revenue collected by the government.
(e) Does the tariff result in a gain or net loss to society as a whole?
Problem 4
Among the tax proposals regulatory considered by Congress is an additional tax on
distilled liquors. The tax would not apply to beer. The price elasticity of supply of liquor
is 4.0, and the price elasticity of demand is -0.2. The cross elasticity of demand for beer
with respect to the price of liquor is 0.1.
(a) If the new tax is imposed, who will bear the greatest burden-liquor suppliers
or liquor consumers? Why?
(b) Assuming that beer supply is infinitely elastic, how will the new tax affect the
beer market?