Exhibit 16-5 Exhibit 16-5 represents the market for leaf tobacco.Suppose the government imposes a floor of $1.25 in this market.How much consumer surplus would be lost as a result of this price support?

Question

Exhibit 16-5  Exhibit 16-5 represents the market for leaf tobacco.Suppose the government imposes a floor of $1.25 in this market.How much consumer surplus would be lost as a result of this price support?

Quizplus · Accepted Answer

Consumer surplus is the area above the equilibrium price and below the demand curve. With a price floor of $1.25, the new equilibrium price is at the floor since the equilibrium quantity demanded and supplied is equal to 160 million pounds of tobacco. The new consumer surplus can be calculated as the area below the demand curve, above the equilibrium price of $1.25, and to the left of the quantity demanded of 160 million pounds. This area is a triangle with a base of 80 million pounds (the excess supply due to the price floor) and a height of ($3.00-$1.25)=$1.75. The new consumer surplus is: 
(1/2) x 80 million pounds x $1.75 = $70 million
The previous consumer surplus at the equilibrium price of $3.00 was:
(1/2) x 200 million pounds x $1.75 = $153.1 million
The difference between the two consumer surpluses is the amount lost due to the price support:
$153.1 million - $70 million = $83.1 million = $875 million (rounded to the nearest $5 million)

Exhibit 16-5 Exhibit 16-5 Represents the Market for Leaf