The Canadian Dairy Commission (CDC) administers the price floor for butter, which was set at $7.40 per kilogram in 2015. At that price, according to data from the CDC, the quantity of butter supplied in 2015 was 109.41 million kilograms, and the quantity demanded was 101.09 million kilograms. To support the price of butter at the price floor, the CDC therefore had to buy up 8.32 million kilograms of butter. The accompanying diagram shows supply and demand curves illustrating the market for butter.

a. In the absence of a price floor, how much consumer surplus is created? How much producer surplus? What is the total surplus?

b. With the price floor at $7.40/kg of butter, consumers buy 101.09 million kilograms of butter. How much consumer surplus is created now?

c. With the price floor at $7.40/kg of butter, producers sell 109.4 million kilograms of butter (some to consumers and some to the CDC). How much producer surplus is created now?

d. How much money does the CDC spend on buying up surplus butter?

e. Suppose the federal government covers the cost of surplus butter using tax revenue, as they do in the United States. As a result, total surplus (producer plus consumer) is reduced by the amount the CDC spent on buying surplus butter. Using your answers for parts (b)ˆ’(d), what is the total surplus when there is a price floor? How does this compare to the total surplus without a price floor from part (a)?

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Price of butter (per kilogram) $10.00 7.40 7.00 Price floor 4.50 101.09 105.9 109.41 Quantity of butter (millions of kilograms)