Unit 6 Assignment: Price Floor

Unit 6 AB224 | Microeconomics
Unit 6 Assignment: Price Floor
Name:
Course Number and Section: AB224-0X
Date:
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In this Assignment, you will be assessed on the following outcome:
AB224-2: Examine changes in price and quantity caused when governments take actions to modify
market outcomes.
Assignment
In a perfectly competitive market, the equilibrium price and quantity represent the most efficient
operation of that market. Optimum efficiency means that sellers cannot be made better off without, at
the same time, making buyers worse off, and that buyers cannot be made better off, without making
the sellers worse off. This Assignment presents a scenario in which a government tries to improve the
financial position of the sellers, in such a perfectly competitive market, by instituting a legal price floor
that is significantly above the equilibrium price. A price floor is the lowest price for which a seller can
legally sell the product.
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Unit 6 AB224 | Microeconomics
In this Assignment, you will focus on calculating the consumer surplus, producer surplus and total
surplus both before a price floor is established and after a price floor is enacted. You will also
demonstrate an understanding of the impact on the entire economy, based on any changes in taxes
required, if the government is to purchase any extra product that is not sold to consumers.
Questions
Suppose that the Gondwanaland Chairman of Production who sets the governmental price floor for
gosum berries, in an effort to assist the gosum berry producers to have a higher income, set the price
floor at $70 per barrel. These berries are a food staple of the Gondwanalandians and contributes
directly to their health and long life (average lifespan of 150+ active years). In that particular year the
amount of gosum berries produced at the $70 price floor was 700 barrels per month. To support the
price of gosum berries, the Chairman of Production’s Office had to purchase 400 barrels per month.
The accompanying diagram shows supply and demand curves illustrating the market for
Gondwanaland gosum berries.
a. In the absence of a price floor, the maximum price that a few of the consumers are willing to pay
up to $100 per barrel of gosum berries. The market equilibrium (E) price is $50 per barrel. How
much consumer surplus is created, when there is no price floor? Show your calculations.
Consumer surplus is the area below the demand curve and above the equilibrium price (Frank, R., & Cartwright,
2013).
Consumer Surplus= 1
2 × ( 100−50 ) ×500
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Unit 6 AB224 | Microeconomics
¿ 1
2 ×50 ×500
¿ 12500
b. How much producer surplus when there is no price floor? Show your calculations.
Producer surplus is the gain enjoyed by the producers. It is obtained as the area above the supply curve and below
the equilibrium price (Blad & Keiding, 2014).
Producer Surplus= 1
2 × 50× 500
¿ 12500
c. What is the total surplus when there is no price floor? Show your calculations.
Total surplus is the sum of consumer and producer surplus (Nicholson & Snyder, 2014).
Total Surplus=Consumer surplus + Producer Surplus
¿ 12500+12500
¿ 25000
d. After the price floor is instituted, the legal minimum price that can be charged by suppliers is $70
per barrel. The maximum price that a few of the consumers are still willing to pay is $100 per
barrel of gosum berries. With the price floor at $70 per barrel, consumers buy 300 barrels of
gosum berries per month. How much consumer surplus is created with the price floor? Show
your calculations.
The instituted price floor at $70, increase the price paid by consumers. This lowers consumer surplus. The new
consumer surplus is obtained as
Consumer Surplus= 1
2 × ( 100−70 ) ×300
¿ 1
2 ×30 ×300
¿ 4500
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