The government has decided that the free market price of cheese is too low. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese? Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain. In response to farmers’ complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?
The government has decided that the free market price of cheese is too low. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese? Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain. In response to farmers’ complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?
Chapter4: Markets In Action
Section: Chapter Questions
Problem 15SQ
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The government has decided that the free market price of cheese is too low.
- Suppose the government imposes a binding
price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese? - Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain.
- In response to farmers’ complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?
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