Question

Plus one more: Problem #10 The daily demand and supply curves for milk in Dairyville are shown in the figure: Price ($ per gallon) Suppose the government imposes a price ceiling on milk of $5 per gallon. 200 400 600 800 1,000 1,200 Quantity (gallons per day) With the price ceiling: a. How many gallons of milk will be bought and sold each day? b. What will be the excess demand for milk each day? c. What will be consumer surplus? d. What will be producer surplus? e. What will be the loss in total economic surplus each day that results from the imposition of the price ceiling? f. Now suppose that a price FLOOR is introduced instead, at P=$8 per gallon. What will be the loss in total economic surplus each day that results from the imposition of the price floor?

Answer 1

Answer : a) At price ceiling of $5 the quantity supplied in the market is 400 gallons per day where the quantity demanded is higher than that. As the quantity supplied is 400 gallons per day at $5 price ceiling hence 400 gallons will be bought and sold per day.

b) At price ceiling of $5,

Excess demand = Quantity demanded - Quantity supplied = 1000 - 400 = 600 gallons per day.

c) Consumer surplus (C.S.) = 0.5 * Height * Base

=> C.S. = 0.5 * (10 - 5) * 400

=> C.S. = 1000

Therefore, here the consumer surplus is $1000.

d) Producer Surplus (P.S.) = 0.5 * Height * Base

=> P.S. = 0.5 * (5 - 1) * 400

=> P.S. = 800

Therefore, here the producer surplus is $800.

e) For price ceiling of $5,

Loss in total economic surplus = 0.5 * (8 - 5) * (600 - 400) = $300

Therefore, here the loss in total economic surplus is $300.

f) For price floor of $8,

Loss in total economic surplus = 0.5 * (8 - 5) * (600 - 400) = $300

Therefore, here the loss in total economic surplus is $300.