The market demand function for wheat is Q^d=10-2P and the market supply function is Q^s=4P-2 , both measured in billions of bushels per year. Suppose the government wants to increase the price of wheat to $3/bushel and they impose a voluntary production reduction program to achieve their goal. How much would the government have to pay farmers? A) $1.5 billion B) $3 billion C) $4.5 billion D) $18 billion

Question

Quizplus · Accepted Answer

To find the amount the government would have to pay farmers, we first determine the quantity of wheat supplied and demanded at the target price of $3/bushel. Substituting $3 into the demand function: Qd = 10 - 2(3) = 4 billion bushels. Substituting $3 into the supply function: Qs = 4(3) - 2 = 10 billion bushels. To reduce the supply from 10 billion bushels to match the demand of 4 billion bushels, the government needs to reduce the supply by 6 billion bushels. At the target price of $3/bushel, the cost to the government for reducing the supply by 6 billion bushels would be 6 billion bushels * $3/bushel = $18 billion. However, the correct calculation involves finding the difference in quantities and not the cost directly associated with the price per bushel in this context. The error in explanation points to a misunderstanding of the question's requirement, which is about the cost to the government for implementing the program, not the direct calculation of quantity times price in this manner. The correct approach involves understanding the economic implications of the supply reduction and the associated costs, which may involve compensating farmers for not producing the wheat up to the reduced amount, but the calculation provided does not accurately reflect the correct answer based on the given options and the explanation provided.

The Market Demand Function for Wheat Is Qd=10-2P and the Market

The Market Demand Function for Wheat Is Q^d=10-2P and the Market