Question

#7. The diagram to the right illustrates the market for beef. Suppose that the government has instituted a price support program for beef by placing a price floor at $4.00 per pound. Under the program, any unsold beef will be purchased by the government and placed in long-term storage a. What is the cost to consumers in lost surplus? b. What is the cost to taxpayers to purchase the Price ($/pound) $4 3 I D unsold beef? c. How much producer surplus do sellers of beef d. What is the loss to society of the beef pro- e. The president of the National Cattleman's Association makes the following semi-extortionary offer to consumers: 0.51.5Quantity of beef (millions 0 gain? gram? "Pay us $2.2 million per month forever and we' of pounds) lobby our congressmen to abandon the price support program." Should consumers pay the Cattleman's Association? Why or why not?

Answer 1

Answer : 7) a) In consumer lost surplus,

Height = 4 - 3 = $1

Base = 0.5

In lost surplus area before price support program the consumer surplus = 0.5 * Height * Base = 0.5 * 1 * 0.5 = $0.25

Therefore, in lost surplus the cost of consumer is $0.25.

b) At $4 price level quantity demanded is 0.5 million of pounds where quantity supplied is 1.5 million of pounds. So, unsold beef = 1.5 - 0.5 = 1 million of pounds.

Therefore, the cost to taxpayer to buy this unsold beef = price * unsold beef quantity = 4 * 1 = $4.

c) After price support program the price level is increased by $1. So, after price support program for producer,

Gained height = $1

Base = 0.5

Gained producer surplus = 0.5 * gained height * base = 0.5 * 1 * 0.5 = $0.25

Therefore, the producer surplus is gained by $0.25.

d) Loss of society = 0.5 * changes in price * changes in quantity = 0.5 * (4 - 3) * (1 - 0.5) = 0.25

Therefore, for beef program the loss of society is $0.25.