The figure below demonstrates the market for wheat in the United States, struggl

Question

The figure below demonstrates the market for wheat in the United States, struggles by wheat farmers have led lawmakers to consider Wheat Market $10 Supply $8 $2 Demand 0 10 20 30 40 50 Quantity (Thousands of Bushels) instituting a price control. a. Without any price control, what is the equilibrium price, and how much wheat is sold? b. Now consider a $6 price floor. How large would the wheat shortage be in this market? c. What areas) represent the loss in consumer surplus as a result of the price floor? d. Does the price floor increase or decrease producer srplus? Explain, how you can tell from the graph. e. Does the price floor increase or decrease economic surplus? Explain how you can tell from the graph.

Explanation / Answer

a) Without any price control, the market will be at an equilibrium at a price $4 and total 20 (thousand of bushels) will be sold in the market.

b) There will be no wheat shortage in the market at the price of $6 but a surplus of 20. Here, at the price of $6 the supply will be 30 and demand will be only 10. Creating a shortage of 20.

c) D and E represents a loss in the consumer surplus after the price Floor.

d) The price floor increases the producer surplus by the area of C and increases it by D. Before the price floor the producer surplus area was A, B, and C.

e) The price floor decreases the economic surplus, after the price floor the deadweight loss is E and C which was part of the econmic surplus.

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