Suppose that thedemand curve for corn is downward-sloping but that the supply curveis perfectly price inelastic at a quantity of Q* once the corn isharvested. Furthermore, assume that the equilibrium price is $ 5per bushel.
a. If the U. S. government decides to enter the marketfor corn and purchase enough so that the price doubles to $ 10 perbushel ( assume that the corn is given away to Russia), indicate ona supply- demand diagram the amount spent on corn by privateAmerican consumers and the amount spent on corn by the U. S.government. If the demand for corn by private American consumers isprice inelastic ( suppose that demand elasticity is equal to 0.5),which amount is larger- that spent by the govern-ment or that spent by private consumers?
b. An alternative method for helping corn farmers is to have thegovernment pay them a subsidy of $ 5 per bushel of corn. Show graphically the amount spenton corn by private consumers under this proposal as well as theamount spent by the U. S. government. Again assuming that thedemand elasticity for corn is 0.5, is the cost to the government ofthe subsidy program greater or less than the cost of the programdescribed in part a?