Suppose an industry trade group has convinced legislators that a price floor should be used so that producer surplus is maximized in the market for milk. The group argues that such a policy would save the "family farm." Assuming a downward-sloping linear demand curve and a horizontal long-run supply curve, determine the resulting price, output and social welfare from such a policy. Compare this
result to the competitive equilibrium.
What will be an ideal response?
Producer surplus is maximized at a price that is midway between the supply curve and the demand curve intercept. Compared to the competitive equilibrium, a lower quantity is sold at a higher price. The area from this new quantity to the competitive quantity in between the demand and supply curves represents the loss of consumer surplus that is not gained by anyone—the deadweight loss.
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When looking at a graph of nominal and real interest rates you notice that nominal rates always lie above real rates. From this you conclude
a. there were serious episodes of deflation in the time frame represented on the graph. b. consumer prices were always rising in the time frame represented on the graph. c. the economy never experienced a recession in the time frame represented on the graph. d. GDP was always increasing for the time frame represented on the graph.
Given the scenario described, if the market price of hammers increased from $9 to $13:
Assume there are three hardware stores, each willing to sell one standard model hammer in a given time period. House Depot can offer their hammer for a minimum of $7. Lace Hardware can offer the hammer for a minimum of $10. Bob's Hardware store can offer the hammer at a minimum price of $13. A. producer surplus would increase for each producer. B. producer surplus would increase only for House Depot. C. producer surplus would remain unchanged for Bob's Hardware. D. producer surplus would increase by $4 for Lace Hardware.