6) Refer to Figure 9.5. If the government establishes a price floor of $2.50, ho
ID: 1195260 • Letter: 6
Question
6) Refer to Figure 9.5. If the government establishes a price floor of $2.50, how many pounds of berries will be sold?
A) 200
B) 300
C) 400
D) 600
E) 800
Answer: A
7) Refer to Figure 9.5. If the government establishes a price floor of $2.50, consumer surplus will
A) fall by $50.
B) fall by $150.
C) remain the same.
D) rise by $50.
E) rise by $150.
Answer: B
8) Refer to Figure 9.5. If the government establishes a price floor of $2.50 and farmers grow only the amount of berries that will be sold, producer surplus will
A) fall by $50.
B) fall by $100.
C) remain the same.
D) rise by $50.
E) rise by $100.
Answer: C
9) Refer to Figure 9.5. If the government establishes a price floor of $2.50 and farmers grow only the amount of berries that will be sold, the resulting deadweight loss will be
A) $1.50.
B) 200 pounds of berries.
C) $150.
D) $250.
E) $300.
Answer: C
15) The market supply function is P = 10 + Q and the market demand function is P = 70 - 2Q. What is the change in consumer surplus associated with a minimum floor price of $30?
A) Zero
B) -$100
C) -$30
D) -$55
Answer: A
16) The market supply function is P = 10 + Q and the market demand function is P = 70 - 2Q. What is the change in consumer surplus associated with a minimum floor price of $40?
A) -$25
B) -$150
C) -$175
D) -$200
Answer: C
Explanation / Answer
6. When government imposes a price floor which is above the equilibrium level of prices, there is excess supply that is created in the economy. This happens because now the sellers get additional $0.50 for each unit sold, hence they supply more. But at the same time, demand for berries fall. This can be found out by simply seeing the corresponding value of $2.50 on the demand curve, which is 200. So the demand would be 200 units which will be supplied by the market. Option A is correct.
7. Consumer surplus is the area above the price line and below the demand curve. The area of triangle of consumer surplus at $2 is computed as triangle $3-$2-intersection point of demand and supply curve. Area of triangle = 1/2*base*height.
Consumer surplus at $2 = 1/2*(400-0)*(3-2)
Consumer surplus = 200.
Consumer surplus at $2.50 = 1/2*(200-0)*(3-2.50)
Consumer surplus = 50.
As we can see that the consumer surplus decreased as the price increases.
Difference in consumer surplus = 200-50 = 150.
So option B is correct.
8. Producer surplus is the area under the price line and above the supply curve. According to question, if the farmers grow only what they can sell of (200 units), then the producer surplus would be the are of rectangle 0-2.50-point on demand curve-200.
Area of rectangle = length*breadth
Area = (2.50-0)*(200-0)
Area = $500.
Original producer surplus area $2-0-point of intersection of demand and supply.
Area of tiangle = 1/2*base*height
Area = 1/2*(400-0)*(2-0)
Area = 400.
So the producer surplus has reduced by growing what they can sell.
Difference in area's = 500-400 = 100.
So option B is correct.
9. Deadweight loss is the area of triangle which neither goes into consumer surplus nor in producer surplus, or to government. It is a loss to the society on the whole.
Area of triangle $2-$1-point of intersection of demand and supply.
Area = 1/2*(2.50-1)*(200-0)
Area = $150. Option C is correct.
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