Question

Use the information on the kumquat market in the table to answer the following questions. $$ \begin{array}{c|c|c} \begin{array}{c} \text { Price } \\ \text { (per crate) } \end{array} & \begin{array}{c} \text { Quantity Demanded } \\ \text { (millions of crates } \\ \text { per year) } \end{array} & \begin{array}{c} \text { Quantity Supplied } \\ \text { (millions of crates } \\ \text { per year) } \end{array} \\ \hline \$ 10 & 120 & 20 \\ \hline 15 & 110 & 60 \\ \hline 20 & 100 & 100 \\ \hline 25 & 90 & 140 \\ \hline 30 & 80 & 180 \\ \hline 35 & 70 & 220 \\ \hline \end{array} $$ a. What are the equilibrium price and quantity? How much revenue do kumquat producers receive when the market is in equilibrium? Draw a graph showing the market equilibrium and the area representing the revenue kumquat producers receive. b. Suppose the federal government decides to impose a price floor of \(\$ 30\) per crate. Now how many crates of kumquats will consumers purchase? How much revenue will kumquat producers receive? Assume that the government does not purchase any surplus kumquats. On your graph from part (a), show the price floor, the change in the quantity of kumquats purchased, and the revenue kumquat producers receive after the price floor is imposed. c. Suppose the government imposes a price floor of \(\$ 30\) per crate and purchases any surplus kumquats from producers. Now how much revenue will kumquat producers receive? How much will the government spend on purchasing surplus kumquats? On your graph from part (a), show the area representing the amount the government spends to purchase the surplus kumquats.

Short answer

a. The equilibrium price and quantity are \$20 and 100 million crates respectively, with total revenue of \$2000 million. b. With a price floor of \$30, consumers will purchase 80 million crates and the total revenue becomes \$2400 million. c. If the government purchases surplus kumquats, the total revenue will increase to \$5400 million.

Step-by-step solution

Identifying The Equilibrium Point

The equilibrium point is the price at which the quantity demanded equals the quantity supplied. Looking at the table, this happens when the price is \$20 per crate (demand of 100 million crates equals supply of 100 million crates).

Calculate Total Revenue at Equilibrium

Revenue is given by the formula \(Revenue = Price \times Quantity\). Hence, the revenue when the market is in equilibrium \(=\$20 \times 100 = \$2000 million.\)

Market Changes to a Price Floor

If the government introduces a price floor of \$30 per crate, we look for the new quantity demanded. This is found to be 80 million crates.

Calculate New Revenue with Price Floor

Using the revenue formula again, the new revenue \(=\$30 \times 80 = \$2400 million.\)

Government Purchases Surplus

If the government purchases surplus kumquats at the price floor of \$30, the total revenue the producers receive increases. The producers are now able to sell the total quantity supplied, which at a price of \$30, is 180 million crates.

Calculate Revenue when the government purchases surplus

The additional revenue from the government purchase of surplus kumquats allows the total revenue to be calculated as \(=\$30 \times 180 = \$5400 million.\)

Key concepts

Quantity Demanded

Quantity demanded refers to how much of a product consumers are willing and able to purchase at a given price. In our kumquat market example, you can see that as the price increases, the quantity demanded decreases. This is a basic principle of economics known as the law of demand.

• At $10 per crate, consumers demand 120 million crates per year.
• When the price reaches $20, the demand is 100 million crates.
• Reaching $30 sees demand drop to 80 million crates.

Understanding this helps businesses predict how changes in price might affect sales and is essential for making pricing decisions. Lower prices typically encourage more purchases, while higher prices do the opposite.

Quantity Supplied

Quantity supplied is the amount of a product that producers are ready to sell at a given price. This relationship is typically directly proportional: as the price increases, the quantity supplied generally increases, following the law of supply.

• At $10, suppliers are ready to provide 20 million crates annually.
• At $20, supply matches demand perfectly at 100 million crates.
• At $30, the supply increases to 180 million crates per year.

Producers aim to maximize profits, so higher prices often lead to more production. Understanding the quantity supplied helps businesses plan how much to produce, especially when looking to meet demand efficiently.

Price Floor

A price floor is a minimum price set by the government for a product, usually above the equilibrium price. It's intended to ensure producers earn a minimum income for their products.
When the government sets a price floor at $30 for kumquats, the quantity demanded drops to 80 million crates, but the quantity supplied rises to 180 million. This creates a surplus of 100 million crates.

• Consumers now purchase fewer kumquats because of the higher price.
• Producers are encouraged to produce more due to higher potential earnings.
• The surplus represents overproduction, which leads to wastage or price adjustments.

Price floors can lead to inefficiencies in the market, as seen by the mismatch between supply and demand.

Government Intervention in Markets

Government intervention occurs when authorities step in to influence how markets operate. This can be through price controls like floors or ceilings, subsidies, or taxes.
In our example, after setting a price floor, if the government purchases the surplus kumquats:

• Producers receive additional revenue since surplus of 100 million crates is also bought.
• Total revenue for producers increases significantly.
• The government spends resources purchasing and possibly storing or disposing of these extra crates.

While this intervention aims to stabilize markets and protect producers, it can result in inefficiencies and costs that impact taxpayers, illustrating the delicate balance governments must maintain in economic policies.