1. Consider the market for some good produced by a competitive industry. The market begins in...

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1. Consider the market for some good produced by a competitive industry. The market begins in equilibrium. a. At the initial equilibrium price and quantity, what are consumer surplus, producer surplus, and the total surplus in this market? b. Now suppose the government imposes a binding price floor (that is, a minimum price that is above the prevailing equilibrium price). However, in contrast to what normally happens with a price floor, when firms cannot sell as much of the good as they want to at the price floor, in this case the government buys any amounts that firms want to sell at the price floor but consumers do not want to buy. It then destroys whatever it buys. What are the resulting quantity produced, quantity bought by consumers, and quantity bought by the government and destroyed? c. Does the price floor cause misallocation of the consumption of the good among consumers, and/or misallocation of the production of the good among firms? (Recall that "misallocation" has a precise meaning in this course. See your notes from Lecture 8 if you are unsure about the definition.) d. What is consumer surplus with this policy? What is producer surplus with the policy? What is government expenditure with the policy? What (if any) is the deadweight loss from the policy? e. Who is hurt by the policy (if anyone)? Who gains (if anyone)? 1. Consider the market for some good produced by a competitive industry. The market begins in equilibrium. a. At the initial equilibrium price and quantity, what are consumer surplus, producer surplus, and the total surplus in this market? b. Now suppose the government imposes a binding price floor (that is, a minimum price that is above the prevailing equilibrium price). However, in contrast to what normally happens with a price floor, when firms cannot sell as much of the good as they want to at the price floor, in this case the government buys any amounts that firms want to sell at the price floor but consumers do not want to buy. It then destroys whatever it buys. What are the resulting quantity produced, quantity bought by consumers, and quantity bought by the government and destroyed? c. Does the price floor cause misallocation of the consumption of the good among consumers, and/or misallocation of the production of the good among firms? (Recall that "misallocation" has a precise meaning in this course. See your notes from Lecture 8 if you are unsure about the definition.) d. What is consumer surplus with this policy? What is producer surplus with the policy? What is government expenditure with the policy? What (if any) is the deadweight loss from the policy? e. Who is hurt by the policy (if anyone)? Who gains (if anyone)?

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In this scenario we are analyzing the impact of a governmentimposed price floor on a competitive ind... View the full answer