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Chapter 3: Problem 1

The market for rice has the following supply and demand schedules: $$\begin{array}{ccc} P(\text { per ton }) & Q^{D} \text { (tons) } & Q^{S} \text { (tons) } \\ \hline \$ 10 & 100 & 0 \\ \$ 20 & 80 & 30 \\\\\$ 30 & 60 & 40 \\\\\$ 40 & 50 & 50 \\\\\$ 50 & 40 & 60\end{array}$$ To support rice producers, the government imposes a price floor of \(\$ 50\) per ton. a. What quantity will be traded in the market? Why? b. What steps might the government have to take to enforce the price floor?

Short Answer

Expert verified
a. The quantity traded in the market would be 40 tons, as that is the quantity demanded at the price floor of $50 per ton. \nb. The government might buy the excess supply, penalize selling below the price floor, set up regulatory bodies to monitor the market, and encourage exports to enforce the price floor.

Step by step solution

01

Identify the Quantity Supplied and Quantity Demanded at the Price Floor

Given the price floor of $50 per ton, look at the supply and demand schedules. At $50, Quantity Demanded (\(Q^D\)) is 40 tons and Quantity Supplied (\(Q^S\)) is 60 tons.
02

Determine the Effective Market Quantity

The quantity of rice that will be traded in the market is determined by what is demanded by consumers because this is the quantity that they are willing and able to purchase at the given price. So, the traded quantity at a price floor of $50 will be 40 tons.
03

Discuss Possible Steps for Government to Enforce the Price Floor

To enforce the price floor, the government might have to take steps such as: \n1. Purchase the excess supply: Since the supply (60 tons) exceeds demand (40 tons) at the price floor of $50, the government might purchase the excess 20 tons to maintain the price.\n2. Impose penalties for selling below the price floor: The government could impose fines or other penalties for producers or sellers found selling rice below the fixed price.\n3. Set up regulatory bodies: These bodies would monitor the market, ensuring compliance with the price control measures.\n4. Encourage exports: By encouraging farmers to export the surplus rice, the government can protect local prices from falling.

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Most popular questions from this chapter

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