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

Please answer the following question. Specific subject : MICROECONOMICS

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?

Expert Solution

a. Binding price floor is set at a price level which is above equilibrium level. The quantity supplied is greater than quantity demanded, so there is surplus in the market.

b. Yes it is possible that price floor has reduced total revenue. If the equilibrium Quantity falls by a greater amount then total revenue can fall. If the demand is elastic, total revenue falls after a rise in price level.

c. If the government buys all the excess cheese, the producers benefits as their total revenue increases. Taxpayers will lose due to the burden of financing the surplus cheese. Consumers will be in the same position as before.

Rahul Sunny answered 2 years ago

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