Ecns 300
Fall 2013
Midterm 1: Due Monday, October 7, 2013, at the beginning of class.
Directions: Answer all questions completely using well-labeled and annotated graphs wherever
possible. Some questions may be sufficiently vague, so the answer could depend on additional
conditions. If that occurs, you are to provide and explain ALL the necessary additional conditions or
clarifications that are required for definitive answers. (This requirement does NOT give you Carte
Blanche to make up any old scenario; make sure your “clarifications” relate directly to answering the
question(s) asked and that those clarifications are reasonable within the confines of the stated problem.
Note: your instructor will be the sole arbiter of what is or is not reasonable.) In problem 4, calculate
numerical values and show all work in a step-by-step progression in addition to using appropriate
graphs. Make sure you follow ALL format guidelines (posted on the course webpage).
1. What happens to the equilibrium price and quantity of a good when both the supply and
demand increase?
2. The Federal Government Food Stamp Program is effectively a subsidy to consumers of covered
foodstuffs.
a. Using a well labeled supply and demand diagram, show how the introduction of a
subsidy to consumers affects producer and consumer surpluses. Label any deadweight
losses (or gains…see part b) and describe (in regular English) what they represent.
b. We have shown that taxes cause deadweight (efficiency) losses. Since subsidies are the
opposite of taxes, does it follow that subsidies cause efficiency gains?
3. Suppose the government imposes a price floor on a good. Will the producers of that good
necessarily be better off? Explain carefully.
4. In the 1930s the Federal Government set up a federal agency called the Commodity Credit
Corporation (CCC). The purpose of the CCC was to support prices received by farmers for
specified crops (e.g. wheat). This was done by having the CCC set a price for each affected
commodity at which it would purchase all crops that remained unsold in the marketplace.
a. Suppose the demand for a commodity is Q = 150 – 0.5 P, and the supply of that
commodity is Q = 30 + 1.5 P.
i. What would be the equilibrium price?
ii. What is the consumer surplus; what is the producer surplus?
b. Suppose the CCC sets a support price for this commodity at $80 per unit.
i. What will be the market price at which this commodity is sold in the private
(non-governmental) market?
ii. How much of this commodity is purchased in the private market?
iii. How much is purchased by the CCC?
iv. What are the consumer and producer surpluses?
v. How much did the taxpayers (through the CCC) pay in total for this commodity?
c. At first the CCC did not have any plans to dispose of the commodities other than they
hoped to sell the commodities in years of particularly small harvests. Since the hopedfor famine years did not develop, by 1960 the stored stockpile of commodities was
becoming embarrassingly large. For example, in 1960, the CCC had accumulated an
amount of wheat in storage that equaled that year’s entire crop. (That’s a lot of wheat!)
To alleviate this situation (and to reduce the cost of storing all of those commodities),
Congress passed food stamp and school lunch programs that supposedly allowed the
CCC to sell the excess on the market without affecting the support price and quantity
sold in the market at that price. Suppose these programs succeeded in that goal (they
didn’t, but let’s act like good government supporters and pretend that they did). If so,
the new market consists of two sets of buyers: those who buy the commodity at the
supported price and those who buy the commodity from the CCC as they “dump” it into
the market to clear the amount they purchased. Suppose the CCC had previously
dumped the accumulated storage amounts so now all they have to do is sell off the
amount of the commodity they buy each year through the price support program.
i. What is the maximum price that the CCC can charge and still sell all of the
commodity it has purchased?
ii. What is the deadweight loss from the totality of the CCC support-price purchase
program with the provision of turning around and reselling the commodity on
the market via the food stamp and school lunch programs? (Assume that the
sale price to these programs is what you stated in your answer to part c-i,
above.)