Question

3) Refer to Figure 9.3.1. If the government establishes a price floor of $40 and government purchases the surplus over quantity demanded, producer surplus will: A) fall by $275. B) fall by $500. C) remain the same. D) rise by $275. E) rise by $500. Answer: E

Please Explain Step by Step. Thanks!

Answer 1

Refer the attached picture before the price floor the equilibrium was $ 30 and quantity demanded was 40 units. Then the producer surplus was as shown in the picture

Price 70 (dollars per widget) 60 Supply. S 20 - Producer Surplus Demand, D 0 10 20 30 40 50 60 Quantity of widgets

The producer surplus is represented by the area of triangle in which producer surplus is written(see picture above)

PS = -x (40 – 0) < (30 – 10) po 1

→ PS = x 40 x 20

S PS = $ 400

After the price floor at $ 40 the quantity supplied = 60 units. The introduction of price floor increased the quantity supplied hence the producer surplus refer the attached picture

Price 70 (dollars per widget) 60 Supply. S New Producer Surplus Demand, D 0 10 20 30 40 50 60 Quantity of widgets

Then, new producer surplus can be determined using the following formula.

New PS = = x (60 – 0) x (40 – 10)

— New PS = = x 60 x 30

New PS = $ 900

Change in producer surplus = $ 900 - $ 400 = $ 500

After the introduction of price floor the producer surplus rise by $ 500.

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