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Chapter 4: Problem 6

Use the information on the kumquat market in the table to answer the following questions. $$ \begin{array}{c|c|c} \begin{array}{c} \text { Price } \\ \text { (per crate) } \end{array} & \begin{array}{c} \text { Quantity Demanded } \\ \text { (millions of crates } \\ \text { per year) } \end{array} & \begin{array}{c} \text { Quantity Supplied } \\ \text { (millions of crates } \\ \text { per year) } \end{array} \\ \hline \$ 10 & 120 & 20 \\ \hline 15 & 110 & 60 \\ \hline 20 & 100 & 100 \\ \hline 25 & 90 & 140 \\ \hline 30 & 80 & 180 \\ \hline 35 & 70 & 220 \\ \hline \end{array} $$ a. What are the equilibrium price and quantity? How much revenue do kumquat producers receive when the market is in equilibrium? Draw a graph showing the market equilibrium and the area representing the revenue kumquat producers receive. b. Suppose the federal government decides to impose a price floor of \(\$ 30\) per crate. Now how many crates of kumquats will consumers purchase? How much revenue will kumquat producers receive? Assume that the government does not purchase any surplus kumquats. On your graph from part (a), show the price floor, the change in the quantity of kumquats purchased, and the revenue kumquat producers receive after the price floor is imposed. c. Suppose the government imposes a price floor of \(\$ 30\) per crate and purchases any surplus kumquats from producers. Now how much revenue will kumquat producers receive? How much will the government spend on purchasing surplus kumquats? On your graph from part (a), show the area representing the amount the government spends to purchase the surplus kumquats.

Short Answer

Expert verified
a. The equilibrium price and quantity are \$20 and 100 million crates respectively, with total revenue of \$2000 million. b. With a price floor of \$30, consumers will purchase 80 million crates and the total revenue becomes \$2400 million. c. If the government purchases surplus kumquats, the total revenue will increase to \$5400 million.

Step by step solution

01

Identifying The Equilibrium Point

The equilibrium point is the price at which the quantity demanded equals the quantity supplied. Looking at the table, this happens when the price is \$20 per crate (demand of 100 million crates equals supply of 100 million crates).
02

Calculate Total Revenue at Equilibrium

Revenue is given by the formula \(Revenue = Price \times Quantity\). Hence, the revenue when the market is in equilibrium \(=\$20 \times 100 = \$2000 million.\)
03

Market Changes to a Price Floor

If the government introduces a price floor of \$30 per crate, we look for the new quantity demanded. This is found to be 80 million crates.
04

Calculate New Revenue with Price Floor

Using the revenue formula again, the new revenue \(=\$30 \times 80 = \$2400 million.\)
05

Government Purchases Surplus

If the government purchases surplus kumquats at the price floor of \$30, the total revenue the producers receive increases. The producers are now able to sell the total quantity supplied, which at a price of \$30, is 180 million crates.
06

Calculate Revenue when the government purchases surplus

The additional revenue from the government purchase of surplus kumquats allows the total revenue to be calculated as \(=\$30 \times 180 = \$5400 million.\)

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Most popular questions from this chapter

An editorial in the Economist magazine discusses the fact that in most countries-including the United States-it is illegal for individuals to buy or sell body parts, such as kidneys. a. Draw a demand and supply graph for the market for kidneys. Show on your graph the legal maximum price of zero and indicate the quantity of kidneys supplied at this price. (Hint: Because we know that some kidneys are donated, the quantity supplied will not be zero.) b. The editorial argues that buying and selling kidneys should be legalized: With proper regulation, a kidney market would be a big improvement over the current sorry state of affairs. Sellers could be checked for disease and drug use, and cared for after operations. ... Buyers would get better kidneys, faster. Both sellers and buyers would do better than in the illegal market, where much of the money goes to middlemen. Do you agree with this argument? Should the government treat kidneys like other goods and allow the market to determine the price?

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