Question

In the United States, price floors are commonly used to support farmers, such as for dairy products. Assume several U.S. trading partners impose tariffs on dairy products exported from the United States. The tariffs are effective and are reducing dairy exports from the United States and have pushed the domestic equilibrium price of milk below the price floor. Using a supply and demand model, illustrate what happens to the U.S. domestic price of milk, quantity of milk sold in the United States, and any surplus or shortage of milk. Be sure to support your graph with a written explanation.

Answer 1

Price flooring is the legal minimum price below which no goods can be traded.

Here. The U.S. imposes price flooring on the milk products which increases the price of milk products in the market.

U.S. trading partners imposing a tariff on the goods exported from the U.S. this will also increase the price of milk products in trading countries of the U.S.

When price flooring is imposed say pf say ($6), this will increase the price of goods in domestic as well as the foreign market for the milk products.

When a tariff is imposed by the trading partners pt say $2 and the total price paid by the foreign country will rise by pf+pt= $8 that will reduce the quantity demanded milk products.

Quantity demanded milk products decrease in the U.S. which creates surplus in the market for milk products.

Excess supply forces the market to reduce price that increases the quantity demanded and reduces quantity supplied.

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