The government has decided that the free market price of milk is too low.
a) Suppose the government imposes a binding price floor in the market. Draw a supply and demand diagram to show the effect of this policy on the price of milk and the quantity of milk sold. [4 points]
b) Farmers complain that the price floor has made them worse off. Is this possible? Explain. [4 points]
c) In response to farmers’ complaints, the government agrees to purchase all the surplus milk at the price floor. Who benefits from this new policy? Who loses?

Answer rating: 100% (QA)

a Suppose the government imposes a binding price floor in the market Draw a supply and demand diagra... View the full answer