Question

Market Distortion - Price Floors Exercise 1 (Algo) The U.S. Department of Agriculture guarantees dairy producers that they will receive at least $1.00 per pound for butter supply to the market. Below is the current monthly demand and supply schedules for wholesale butter (in millions of pou per month). Market for Wholesale Butter Quantity of Butter Demanded Quantity of k Butter Supplied (millions of pounds) (millions of Price (dollars pounds) per pound) $0.80 63 107 71 104 0.90 79 101 1.00 87 98 1.10 95 ces 95 1.20 103 92 1.30 111 89 1.40 119 86 1.50 127 83 1.60 135 80 1.70 143 77 1.80 Instructions: Round your answer for price to two decimal places. Enter your answers for quantity as a whole number a. What are the equilibrium price and quantity in the wholesale butter market? P $ 1.20 b. What is the monthly surplus created in the wholesale butter market due to the price support (price floor) program? 10 of 11 95 million pounds Q= Next > Prev 10 of 11 million pounds d. Given the new supply of butter, what is the monthly surplus of butter created by the price support program? LL 08 I 08 OL T 09 T 6TT 98 OS T IIT 68 0 T EOT 56 86 OT T 6L TOT 00 T IL OT 06 0 08 09 (punod zod £9 LOT (spunod go suoTTTTu) poTTddns 1033ng go KaTaueno noN pounds) pounds) osuoTTTTu) 3o suoTIT TTop) 0oTad poTIddng 2033ng 3o aaueno Quantity of Market for Wholesale Butter Mau aui ui Ill supply schedule given the change in the cost of feeding cows. price. Suppose that a decrease in the cost of feeding cows shifts the supply schedule to the right by 40 million pounds at every 11 million pounds

Answer 1

(a)

Equilibrium is attained at the equality of the quantity demanded and quantity supplied.

Quantity demanded equals quantity supplied corresponding to the price of $1.20 per pound and quantity of 95 million pounds.

So,

P = $1.20 per pound

Q = 95 million pounds

(b)

Price floor can only be binding when price fixed is above the equilibrium price.

The price floor is fixed at $1 per pound while the equilibrium price is $1.20 per pound.

Since, price floor is below the equilibrium price, it would not be binding.

Thus, market will remain in equilibrium.

So,

The monthly surplus created would be zero.

(c)

The supply schedule shifts to the right by 40 million pounds at every price. This means that supply will increase by 40 million at each price.

Following is the complete table -

Price	Quantity demanded	Initial quantity supplied	New quantity supplied
0.80	107	63	103
0.90	104	71	111
1.00	101	79	119
1.10	98	87	127
1.20	95	95	135
1.30	92	103	143
1.40	89	111	151
1.50	86	119	159
1.60	83	127	167
1.70	80	135	175
1.80	77	143	183

(d)

The price support program has fixed the price floor at $1 per pound.

At $1 per pound, quantity demanded is 101 million pounds and quantity supplied is 119 million pounds.

So,

Surplus = QS - QD = 119 - 101 = 18 million pounds

Thus,

The monthly surplus created by the price support program is 18 million pounds.