Homework Answers
Answer: E. Both (b) and (d).
With the price floor producer surplus is lower than under free market.
There will be excess demand in this market.
Both the statements (b) and (d) are false.
In the above figure, the demand curve is shown by curve 'DD' , and the supply curve is shown by curve 'SS'.The free market price of tomato is P1. If the government thinks this free market tomato price is too low and introduces price floor, the new price would be above the free market price 'P1'. Let, after the price floor, the new price of tomato is PF. At this price level, the producer surplus increases, and consumer surplus decreases from 'eDP1' to 'aDPF'. Also, at this new price,there will be an excess supply of tomato to the amount of 'ab' in the market.
Thus, after the introduction of the price floor, the producer surplus is higher than under free market , and there will be an excess supply in this market.
So the statements, 'with the price floor producer surplus is lower than under free market' , and 'there will be excess demand in this market' both are false statements.
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