Demand and supply in the wheat market are given by: QD = 2000 – 1000

Demand and supply in the wheat market are given by:

QD = 2000 – 1000 P and QS = -500 + 1000 P

where Q is millions of bushels and P is price per bushel.

a. Find the equilibrium price and quantity.
b. Suppose that the government wishes to support farm income and thus sets a price floor of $1.50/bushel. Find the size of the farm surplus.
c. What is the cost of this program to the government?

ANSWER

a. P = $1.25, Q = 750
b. If P = $1.50, QD = 500 and QS = 1000. The surplus is 500 (million) bushels.
c. $1.50 × 500 = $750 million.