Question

Suppose there is a perfectly competitive market for curry puffs. The perfectly competitive equilibrium price in this market is RM5 per puff. The perfectly competitive equilibrium quantity is 5,000 curry puffs. (a) Using a diagram, illustrate the perfectly competitive equilibrium in the market for curry puffs. Clearly label the areas of consumer surplus, producer surplus, and social surplus at this equilibrium. [3 marks]

(b) Suppose that the government introduces a price floor for curry puffs at RM7 each.

Note: Use your diagram in part (a) to indicate and explain what happens to consumer surplus, producer surplus, and social surplus under this policy.

(c) In addition to imposing the price floor, the government now also agrees to buy any curry puffs that are offered for sale at this price but are not purchased by consumers. Any curry puffs bought by the government are thrown in the garbage (i.e. they are thrown away and not eaten). Discuss the impact of this policy to the producers, consumers and the society as a whole. [3 marks]

Answer 1