NOTE to Question # 11(b): Suppose that the government establishes a price floor of $4.60 for...

NOTE to Question # 11(b): Suppose that the government establishes a price floor of $4.60 for wheat.

Question # 11 (b): State in a concise manner the main effects of this price floor in the wheat market.

Answer Q # 11(b):

Expert Solution

Price floor is the the minimum price that is fixed by the government above the equilibrium price. At equilibrium price producers are not able to generate sufficient revenue. The equilibrium price is not considered as remunerative by the producers of wheat. So in order to protect them, GOVERNMENT fix a price higher than the equilibrium price .

When price is Increased above equilibrium price, producers are willing to supply more ( explain by law of supply, when price increases quantity supplied also increases) and Consumers are willing to buy less ( as explained by law of demand as price increases quantity demand decreases). This results in excess supply ( surplus ) of wheat in the market.

I.e. Quantity Demanded < Quantity supplied ( excess supply or surplus)

Given that D and S are and supply curve respectively intersecting at point E. Accordingly P is the equlibrium price and Q is the equlibrium Quantity.

When price is increase from P to P1, Quantity supplied rises from Q to Q1 and quality Demanded falls from Q to Q0. As a result there is excess supply equal to Q0Q1.

Rahul Sunny answered 2 years ago

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