Question

The U.S. Department of Agriculture guarantees dairy producers that they will receive at least $1.00 per pound of butter they supply to the market. Below is the current monthly demand and supply schedule for wholesale butter (in millions of pounds per month). Wholesale Butter Market
Price (dollars per pound) Quantity of Butter Demanded Quantity of Butter Supplied
(millions of pounds) (millions of pounds)
$0.80 107 63 0
.90 104 71
1.00 101 79
1.10 98 87
1.20 95 95
1.30 92 103
1.40 89 111
1.50 86 119
1.60 83 127
1.70 80 135
1.80 77 143
a. In the butter market, the monthly equilibrium quantity is million pounds and the equilibrium price is $ per pound.
b. What is the monthly surplus created in the wholesale butter market due to the price support (price floor) program? 22 million pounds 79 million pounds Zero 11 million pounds Suppose that a decrease in the cost of feeding cows shifts the supply schedule to the right by 40 million pounds at every price.

Answer 1

Answer:

a. In the butter market, the monthly equilibrium quantity is 95 million pounds and the equilibrium price is $1.2 per pound.

b. The correct option is zero.

c. See the attached excel file for the new supply schedule.

d. The monthly surplus created by the price support program is 18 million pounds given the new supply of butter.

Step-by-step explanation:

Note: This question is not complete. A complete question is therefore provided in the attached Microsoft word file.

a. In the butter market, the monthly equilibrium quantity is million pounds and the equilibrium price is $ per pound.

At equilibrium, quantity demanded must be equal with the quantity supplied.

In this question, equilibrium occurs at the price of $1.20 per pound and quantity of 95 million pounds.

Therefore, in the butter market, the monthly equilibrium quantity is 95 million pounds and the equilibrium price is $1.2 per pound.

b. What is the monthly surplus created in the wholesale butter market due to the price support (price floor) program?

Price floor refers to a government price control on the lowest price that can be charged for a commodity.

It should be noted that for a price floor to be binding, it has to be fixed above the equilibrium price.

Since the price floor of $1 per pound is lower than the equilibrium price of $1.2 per pound, the price floor will therefore not be binding. As a result, the market will still be at the equilibrium point and the monthly surplus created in the wholesale butter market due to the price support (price floor) program will be zero.

Therefore, the correct option is zero.

c. Fill in the new supply schedule given the change in the cost of feeding cows.

Since a decrease in the cost of feeding cows shifts the supply schedule to the right by 40 million pounds at every price, this implies that there will be an increase in supply by 40 million at each price.

Note: Find attached the excel file for the new supply schedule.

d. Given the new supply of butter, what is the monthly surplus of butter created by the price support program?

Since the price floor has been fixed at $1 per pound by the price support program, we can observe that the quantity demanded is 101 million pounds and quantity supplied is 119 million pounds at this price floor of $1. The surplus created is then the difference between the quantity demanded and quantity supplied as follows:

Surplus created = Quantity supplied - Quantity demanded = 119 - 101 = 18 million pounds

Therefore, the monthly surplus created by the price support program is 18 million pounds given the new supply of butter.

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