Question

Suppose at the current equilibrium price many dairy producers are losing money and we’ll go bankrupt if the price of milk does not rise soon. One proposal to help dairy producers to place a $3.50 per gallon price floor on milk. how exactly would this price control affect the well-being of milk consumers. compute below exactly how consumer well-being will change and show clearly on the graph

4. The graph below represents the market for milk. P ($) 4.00 3.00 2.00 1.00 Q milk (gallons) 1000 2000 3000 4000 5000 6000 7000 8000 9000 Suppose at the currently equilibrium price many dairy producers are losing money and will go bankrupt if the price of milk doesn't rise soon. One proposal to help dairy producers is to place a a $3.50/gallon price floor on milk. How exactly would this price control affect the well-being of milk consumers. Compute below exactly how consumer well-being will change and show clearly on the graph (shadings & labels). (3)

Answer 1

A binding price floor as in this case would help the producers but would reduce the consumer surplus.

Earlier the consumer surplus was the area between the price line of $2.50 and the Demand curve.

Now the consumer surplus has reduced to the area of triangle of the price line of $3.50 and the Demand curve

Cs1=1/2*b*h= 1/2*(4.50-2.50)*6000= 3000*2=$6000

CS2= 1/2*b*h= 1/2(4.50-3.50)*3000= $1500

The consumer surplus has been reduced to half because of this price floor.

Price 4.50 3.50 2.50 3000 6000 Quantity

The green area is the loss of consumer surplus with the price change

The blue area is the new consumer surplus

And the complete colored area ie blue+ green would be original consumer surplus.