Suppose supply of organic pinto beans in Ontario is given by QS = -8 + 0.5*P where P is the market price and QS is the quantity supplied. The demand for organic pinto beans is given by QD = 10 – 0.25*P, where QD is the quantity demanded. When answering the following question, be sure to show your work.
1. Assuming a competitive market, compute the equilibrium price and quantity in the market.
2. Draw the demand, supply curves and indicate the equilibrium price and quantity on a properly labeled graph.
3. Calculate producer surplus, consumer surplus and total surplus at the competitive equilibrium. 2
4. Suppose the pinto bean growers successfully lobby government for a supply management scheme that would see production quota allocated such that the quantity available on the market equaled 2. Show your work in answering the following questions:
a. Calculate new market-clearing price at the given level of quota.
b. Calculate the marginal cost of production at the given level of quota. Substitute the level of production quota into the supply equation and solve for price: QSQ = 2 = -8 + 0.5*P. Now recall that the supply curve is really a marginal cost curve, so in this case we replace price with marginal cost. Consequently, MC=$20.
c. Calculate consumer surplus with this supply management scheme.
d. Calculate producer surplus (with quota rents) with the supply management scheme.
e. What is total surplus with supply management
f. What is the deadweight loss associated with the supply management scheme and who gains and who loses from this scheme?
g. Draw a properly-labeled graph indicating the effect of the quota on the market.