Refer to Table 4-10. An agricultural price floor is a price that the government guarantees farmers will receive for a particular crop. Suppose the federal government sets a price floor for wheat at $21 per bushel

Question

a. What is the amount of shortage or surplus in the wheat market as result of the price floor?
b. If the government agrees to purchase any surplus output at $21, how much will it cost the government?
c. If the government buys all of the farmers' output at the floor price, how many bushels of wheat will it have to purchase and how much will it cost the government?
d. Suppose the government buys up all of the farmers' output at the floor price and then sells the output to consumers at whatever price it can get. Under this scheme, what is the price at which the government will be able to sell off all of the output it had purchased from farmers? What is the revenue received from the government's sale?
e. In this problem we have considered two government schemes: (1 ) a price floor is established and the government purchases any excess output and (2 ) the government buys all the farmers' output at the floor price and resells at whatever price it can get. Which scheme will taxpayers prefer?
f. Consider again the two schemes. Which scheme will the farmers prefer?
g. Consider again the two schemes. Which scheme will wheat buyers prefer?

Answer 1

a. 22,000 surplus.
b. $21 × 22,000 = $462,000.
c. 30,000 bushels × $21 = $630,000.
d. $6 per bushel and government receives $6 × 30,000 = $180,000.
e. Taxpayers prefer scheme (1).
f. In terms of revenue, farmers are indifferent between the two schemes.
g. Wheat buyers prefer scheme (2).