Much of the demand for U.S. agricultural output has come from other countries. In 1998, the total demand for wheat was Q = 3244 - 283 P. Of this, total domestic demand was QD = 1700 - 107 P, and domestic supply was QS = 1944 + 207 P. Suppose the export demand (the difference between total demand and domestic demand) falls by 40 percent.
a) U.S. farmers are concerned about this drop in export demand. What happens to the free-market price of wheat in the U.S.? Do farmers have much reason to worry?
b) Now suppose the U.S. government wants to buy enough wheat to raise the price to $3.50 per bushel. With the drop in export demand, how much wheat would the government have to buy? What would be the cost to government?