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Suppose that the demand curve for apples is QD = 100 – 10p and the supply curve is QS = 10p, where quantities are in kilograms and price is in dollars. The current equilibrium price is $5 and 50 kilograms of apples are sold.
The government is considering two policies that support the apple growers.
Policy 1: Offer a subsidy of $2 per unit to the apple farmers.
Policy 2: Set the price floor at $6 and the government purchases all surplus.
a) Illustrate the effect of each policy on the apple market. By using letters, identify the area that corresponds to consumer surplus, producer surplus and the cost to the government.
b) For each policy, compute consumer surplus, producer surplus and the cost to the government.
c) Which policy do you recommend? Explain your answer.
