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ECON101 Lecture Notes - Lecture 4: Price Ceiling, Economic Surplus, Price Floor

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violetmuskrat44
4 Aug 2018
School
University of Delaware
Department
Economics
Course
ECON101
Professor
Jens Schubert

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Document Summary

Consumers buy goods and producers sell goods as it makes them better off (at least as good off) Consumer surplus - difference between the highest price a consumer is willing to pay for a good/service and the actual price the consumer pays. Producer surplus - difference between the lowest price a firm would be willing to accept for a good/service and the price it actually receives. Ex: four people are interested in buying one orange each, each consumer has a different value for an orange. It depends on the price of oranges and on consumers" marginal benefit. If the price is low, many consumers benefit. If the price is high (if any) few consumers benefit. Producer surplus - is the difference between the lowest price a firm would be willing to accept for a good/service and the price it actually receives. Total net benefit = total benefit + total cost.

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Related Questions

10. Producer surplus is the A) difference between the maximum price consumers are willing to pay and the minimum price producers are willing to accept. B) difference between producers' revenues and opportunity costs of production. C) opportunity cost of production. D) area under the supply curve. E) total amount paid for the good.

3. Consmer surplus is: (a) the difference between what producers are willing to accept for a good and what they actually receive. (b) the difference between what producers actually pay for a good and what they are willing to pay. (c) the difference between what consumers are willing to pay for a good and what they actually pay. (d) the difference between what consumers are willing to pay for a good and what producers are willing to accept.

Suppose that the U.S. Department of Agriculture (USDA) administers the price floor for cheese, set at $0.17 per pound of cheese. (In real life the actual price floor was officially set at $16.10 per hundredweight of cheese. One hundredweight is 100 pounds.) At that price, according to data from the USDA, the quantity of cheese produced in 2009 by U.S. producers was 212.5 billion pounds, and the quantity demanded was 211 billion pounds. To support the price of cheese on the price floor, the USDA had to buy up to 1.5 billion pounds of cheese. The accompanying diagram shows the supply and demand curves illustrating the market for cheese.

A. In the absence of a price floor, the maximum price that a few of the consumers are willing to pay is $0.20 for a pound of cheese whereas the market equilibrium price is $0.13 per pound. The graph also shows that the minimum price at which a few of the producers are willing to sell is $0.06 per pound. In the absence of a price floor, how much consumer surplus is created?

b. How much producer surplus?

c. What is the total surplus?

D. The maximum price that a few of the consumers are willing to pay is $0.20 per pound of cheese, and the price floor is set at $0.17 per pound. With the price floor at $0.17 per pound of cheese, consumers buy 211 billion pounds of cheese. How much consumer surplus is created now?

E. The minimum price at which a few of the producers are willing to sell a pound of cheese is $0.06, and the price floor is set at $0.17 per pound. With the price floor at $0.17 per pound of cheese, producers sell 212.5 billion pounds of cheese (some to consumers and some to the USDA). How much producer surplus is created now?

F. The surplus cheese USDA buys is the difference between the number of cheese producers sell (212.5 billions pounds of cheese) and the number of cheese consumers is willing to buy at the price floor (211 billions pounds of cheese). How much money does the USDA spend on buying up surplus cheese?

G. Taxes must be collected to pay for the purchases of surplus cheese by the USDA. As a result, the total surplus (producer plus consumer) is reduced by the amount the USDA spent on buying surplus cheese. Using your answers for parts d, e, and f, what is the total surplus when there is a price floor?

H. How does this compare to the total surplus without a price floor from part c?