Exhibit 4-8
Refer to Exhibit 4-8. Suppose that wheat producers lobby the government for a price floor and receive one. This price floor is set at P_F. What has happened to the consumers' surplus as a result of the imposition of the price floor?

Question

Exhibit 4-8

Refer to Exhibit 4-8. Suppose that wheat producers lobby the government for a price floor and receive one. This price floor is set at P_F. What has happened to the consumers' surplus as a result of the imposition of the price floor?

Quizplus · Accepted Answer

The imposition of a price floor results in a lower quantity demanded (Qd1) and higher quantity supplied (Qs1) than in the absence of a price floor. This leads to a surplus of wheat (Qs1 - Qd1), which is purchased by the government (area 5). The consumers' surplus is the area below the demand curve and above the market price (P0) before the price floor is imposed (area 1 + 2 + 3), minus the area below the demand curve and above the market price after the price floor is imposed (area 1 + 3). Thus, the consumers' surplus has gone down by (area 2 + 4).

Exhibit 4-8 Refer to Exhibit 4-8. Suppose That Wheat Producers Lobby the Government for the Government