Price Floors and Producer Surplus

question 20

Essay

Price Floors and Producer Surplus. The U. S. wheat crop averages about 2 billion bushels per year, and is about 10 percent of the 20 billion-bushel foreign wheat crop. Typically, the market has a relatively good estimate of the wheat crop from the United States and Canada, but wheat crops from the Southern Hemisphere are much harder to predict. Argentina's wheat acreage varies dramatically from one year to another, for example, and Australia has hard-to-predict rainfall in key wheat production areas. To illustrate some of the cost in social welfare from agricultural price supports, assume the following market supply and demand conditions for wheat:
where Q is output in bushels of wheat (in millions), and P is the market price per bushel.

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Definitions:

Monthly Compounded

Monthly compounded refers to the process of calculating interest on a principal amount where the interest is added to the principal at the end of each month, thereby earning interest on interest in subsequent months.

Effective Rate

The interest rate on a loan or investment, adjusted for the effect of compounding.

Interest Rate

The rate at which a borrower is charged interest for the money borrowed from a lender.

Cash Rebate

A partial refund to someone who has paid too much money for tax, rent, or a utility, or as a promotional incentive from the purchase of goods or services.