Question

9. The inefficiency of price controls Aa Aa The following graph shows the market for corn in the United States. PRICE Dollars per bushell 8.00 Demand Supply Gain in PS Loss of PS 0.00 0 200 400 600 800 QUANTITY IMillions of bushels per month Help Worried that low corn prices will harm farmers, lawmakers impose a price floor of $5.00 per bushel. The imposition of the price floor leads to bushels of corn per month. The change in producer surplus from the imposition of a price floor comes from two effects: (1) a change in the quantity produced; and (2) a change in the price. Assume that all suppliers of this good have the same cost structure, and thus they produce the lowest-cost units of the good first. On the graph, use the red triangle (cross symbols) to shade the area representing the loss of producer surplus from the units that will no longer be produced. Use the green rectangle (triangle symbols) to shade the area representing the gain in producer surplus caused by the price change for units that continue to be sold under the price floor.

Answer 1

Imposition of price floor of $5 which is binding (in the sense that it is more than the equilibrium price) will lead to excess supply of quantity of bushels of corn per month. This is due to the fact that at $5, farmers are willing to sell 500 units but the demand is only 300 units. Thus, there is excess supply of 200 units at this price floor.

This leads to a deadweight loss equal to (1/2) * (5-3) * (400 - 300) = 100. This is the area of triangle (300,3), (400,4) (300,5)