The government has decided that the free market price of tabacco is too low. a.Suppose the...

The government has decided that the free market price of tabacco is too low.

a.Suppose the government imposes a binding price floor in the tobacco market. Use a supply and demand diagram to show the effect of this policy on the price of tobacco and the quantity to tobacco sold. Is there a shortage or surplus of tobacco? What does the market outcome depend on?

b.Tobacco producers complain that the price floor has reduced their total revenue . Is this possible? Exlpain.

c- In response to producers' complaints, the government agrees to purchase all of the surplus tobacco at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?

Expert Solution

A)

There is surplus of good in the market after price floor.

B) yes, it is possible. If demand is Elastic ,then price floor will lead to decrease in total revenue of firm.

C)The sellers benefits from this new policy as there is no surplus of good in the market,they can sell as much they want at price floor.

Buyers loses from this, If government wouldn't buy the Surplus amount ,then seller would have tried to sell good at lower price than price floor in black market, which would result in gain to CONSUMERs. But due goverment action of buying surplus amount at price floor,now seller won't sell lower than price floor.

Rahul Sunny answered 2 years ago

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