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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

The government has decided that the free-market price of cheese is too low.

a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?

b. Producers of cheese complain that the price floor has reduced their total revenue. Is this possible? Explain.

c. In response to cheese producers′ complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?

Sub part (a):

To determine
The impact of the price floor on the cheese market.

Explanation

The price controls are the government-controlled price mechanisms. The maximum and the minimum prices will be set under the price controls by the government in order to prevent overpricing and underpricing in the market to protect consumer as well as producer interests. The price control mechanisms are known as the price ceilings and price floor.

The price floor is the minimum price that can be charged for the product in the market. This is to prevent the prices from going too low and making a loss for the producers and service providers. The most common price floor is the minimum wages set by the government. The laborers should be paid minimum wages when their services are rendered. Similarly, the price ceiling is the maximum limit price that can be charged for a good or service in the market. This is to prevent the prices from going too high and to prevent the exploitation of consumers.

The price floor is the government-decided minimum price for the goods and services from the market...

Sub part (b):

To determine
The impact of the price floor on the cheese market.

Sub part (c):

To determine
The impact of the price floor on the cheese market.

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