Economics
Economics
5th Edition
ISBN: 9781319066604
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
bartleby

Concept explainers

Question
Book Icon
Chapter 5, Problem 3P
To determine

a.

The producer surplus, consumer surplus and total surplus in the absence of price floor.

Introduction: Consumer surplus refers to the additional profit a consumer gets due to the difference between the price of a commodity in the market and the price a consumer is ready to give for a particular commodity at a given period of time.

Producer surplus on the other hand is the additional surplus of the producers due to the difference in the price of a good at which the producer wants to the supply with the prices the consumers are ready to pay for a commodity in the market at a particular period of time.

Total surplus is the total sum of the consumer as well as the producer surplus in an economy in a given period of time. Total surplus is also referred to as the economic surplus.

Equilibrium price is the price of a commodity in the market at which both the consumers as well as the producers have no intension to change from.

Price floor refers to the minimum prices decided by the government of a country so as to minimize the change in the price of commodities.

Expert Solution
Check Mark

Explanation of Solution

The diagram given below depicts the quantity demanded and quantity supplied of butter in billion pounds:

Economics, Chapter 5, Problem 3P

The consumer surplus in the absence of price floor in the market is calculated with the area below the demand curve and above the equilibrium prices in the economy. From the figure given above, the consumer surplus will be the area above the equilibrium price of $0.15 and below the equilibrium demand that is the area between quantities 0 to 200 billion.

Formula to calculate consumer surplus is as follows:

    Consumerssurplus=((Price above equillibrium-Equillibrium price)×Equillibrium quantity demanded)2

Substitute, $0.25 for the price above equilibrium, 0.15 for equilibrium price and $200 for the equilibrium quantity demanded in the above formula,

    Consumerssurplus=($0.25$0.15)billion×200billion2=$10billion

Hence, consumer surplus is $10 billion.

Similarly, producer surplus can be calculated with the area above the supply curve but below the equilibrium prices.

Formula to calculate producer surplus is as follows:

    Producersurplus=((Equillibrium price-Price below equilibrium price)×Equillibrium quantity demanded)2

Substitute 0.15 for the equilibrium price, 0.05 for the price below equilibrium price and $200 billion for equilibrium quantity demanded in the above formula,

    Producersurplus=($0.15$0.05)billion×200billion2=$10billion

Hence, producer surplus is $10 billion.

Thus, formula to calculate total surplus is as follows:

Total Surplus=Consumer Surplus+Producer Surplus

Substitute $10 billion for consumer surplus and $10 billion for producer surplus in the formula.

    Totalsurplus=$10+$10=$20 Billion

Hence, the total surplus is $20 billion.

To determine

b.

Consumer surplus if price floor is at $0.18 and consumer buy 140 billion pounds of milk.

Expert Solution
Check Mark

Explanation of Solution

If price floor is set at $0.18 per pound, the consumer will purchase at the prices above the price floor but below the maximum price level that is $0.25 as shown in the figure 1.

The formula to calculate consumer surplus as per this explanation is as follows:

    ConsumerSurplus=((Maximum price-Floor Price)×Equilbrium quantity)

Substitute $0.25 for the maximum price, $0.18 for the floor price and 200 billion for the equilibrium quantity in the above formula,

    ConsumerSurplus=($0.25$0.18)×200 billion=$47billion

Hence, the consumer surplus is $47 billion.

To determine

c.

The amount of producer surplus if price floor is at $0.18 per pound of milk and producers tend to sell 240 billion pounds of milk.

Expert Solution
Check Mark

Explanation of Solution

With the price floor set, the producers tend to fix the sale of milk at 240 billion pounds. With this increased quantity more than the equilibrium quantity that was 1.65 billion.

Formula to calculate producer surplus is as follows:

    Producersurplus=(Floor PriceLowest price)×sales2

Substitute 0.18 for floor price, 0.05 for lowest price and 240 billion for sales in the formula.

    Producersurplus=($0.18$0.05)×240billion2=$31.22=$15.6billion

Hence, the producer surplus is $15.6 billion.

To determine

d.

The money spent by the USDA (U.S. Department of Agriculture) to buy surplus milk.

Expert Solution
Check Mark

Explanation of Solution

The USDA has to buy 240 million pounds of milk.

Formula to calculate the money spends to buy 240billion pounds of milk is as follows:

    Moneyspent= Floor price×Sale volume

Substitute, 0.18 for floor price and 240 billion for sales volume in the formula,

    Moneyspent=$0.18×240 billion=$43.2 Billion

Hence, the amount of money spent is $43.2 billion.

To determine

e.

The total surplus in case of price floor and analyze the difference in the total surplus with price without a price floor.

Expert Solution
Check Mark

Explanation of Solution

In case price floor is set by the government, the formula to calculate total surplus is as follows:

    Totalsurplus=Consumersurplus+ProducersurplusMoneyspent

Substitute, 47 Billion for consumer surplus, $15.6 Billion for producer surplus and $43.2 Billion for the money spent in the formula,

    Totalsurplus=$47+$15.6$43.2=$19.4

Hence, the total surplus is $19.4 billion.

The total surplus in an economy when price floor is set by the government is less as compared to the total surplus before the advent of price floor. This is because of the reduction in both the producer as well as the consumer surplus in the economy.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Economics
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education