Question;Suppose that the U.S. Department of;Agriculture (USDA) administers the price floor for cheese, set at $0.17 per;pound of cheese. (In real life the actual price floor was officially set at;$16.10 per hundredweight of cheese. One hundredweight is 100 pounds.) At that;price, according to data from the USDA, the quantity of cheese produced in 2009;by U.S. producers was 212.5 billion pounds, and the quantity demanded was 211;billion pounds. To support the price of cheese at the price floor, the USDA had;to buy up 1.5 billion pounds of cheese. The accompanying diagram shows supply;and demand curves illustrating the market for cheese.;a. In the absence of a price floor, the maximum price that a few of the;consumers are willing to pay is $0.20 for a pound of cheese whereas the market;equilibrium price is $0.13 per pound. The graph also shows that the minimum;price at which a few of the producers are willing to sell is $0.06 per pound.;In the absence of a price floor, how much consumer surplus is created?;b. How much producer surplus?;c. What is the total surplus?;d. The maximum price that a few of the consumers are willing to pay is $0.20;per pound of cheese, and the price floor is set at $0.17 per pound. With the;price floor at $0.17 per pound of cheese, consumers buy 211 billion pounds of;cheese. How much consumer surplus is created now?;e. The minimum price at which a few of the producers are willing to sell a;pound of cheese is $0.06, and the price floor is set at $0.17 per pound. With;the price floor at $0.17 per pound of cheese, producers sell 212.5 billion;pounds of cheese (some to consumers and some to the USDA). How much producer;surplus is created now?;f. The surplus cheese USDA buys is the difference between the quantity of;cheese producers sell (212.5 billions of pounds of cheese) and the quantity of;cheese consumers are willing to buy at the price floor (211 billions of pounds;of cheese). How much money does the USDA spend on buying up surplus cheese?;g. Taxes must be collected to pay for the purchases of surplus cheese by the;USDA. As a result, total surplus (producer plus consumer) is reduced by the;amount the USDA spent on buying surplus cheese. Using your answers for parts d;e, and f, what is the total surplus when there is a price floor?;h. How does this compare to the total surplus without a price floor from part;c?
Paper#55643 | Written in 18-Jul-2015Price : $23