Figure 9.4.1
-Refer to Figure 9.4.1 above. Suppose the government raises the price of cheese above the market equilibrium level (P₀) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure below, what is the change in producer surplus after this policy is adopted?

Question

Figure 9.4.1 -Refer to Figure 9.4.1 above. Suppose the government raises the price of cheese above the market equilibrium level (P<sub>0</sub>) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure below, what is the change in producer surplus after this policy is adopted? A) Producers lose area C but gain area A. B) Producers lose area C but gain area A+B. C) Producers gain A. D) Producers gain area A+B+D.

Quizplus · Accepted Answer

When the government sets a price floor above the market equilibrium and buys up the excess supply, producers gain because they are able to sell more at a higher price. The change in producer surplus includes the gain of areas A (the additional revenue from selling the initial quantity at a higher price) and B (the revenue from selling the excess quantity at the higher price), plus area D (the additional producer surplus from the higher price on the initial quantity). Area C is not lost because it represents consumer surplus at the equilibrium price, which is not directly relevant to the change in producer surplus from this policy.

Figure 9.4.1 -Refer to Figure 9.4.1 Above. Suppose the Government Raises the Raises