price floor

Unit 6 Assignment: Price Floor
Name:
Course Number and Section:AB224-0X
Date:
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In this Assignment, you will be assessed on the following outcome:
AB224-2: Examine changes in price and quantity caused when governments take actions to modify market outcomes.
Assignment
In a perfectly competitive market, the equilibrium price and quantity represent the most efficient operation of that market. Optimum efficiency means that sellers cannot be made better off without, at the same time, making buyers worse off, and that buyers cannot be made better off, without making the sellers worse off.

This Assignment presents a scenario in which a government tries to improve the financial position of the sellers, in such a perfectly competitive market, by instituting a legal price floor that is significantly above the equilibrium price. A price floor is the lowest price for which a seller can legally sell the product.
In this Assignment, you will focus on calculating the consumer surplus, producer surplus and total surplus both before a price floor is established and after a price floor is enacted. You will also demonstrate an understanding of the impact on the entire economy, based on any changes in taxes required, if the government is to purchase any extra product that is not sold to consumers.
Questions
Suppose that the Gondwanaland Chairman of Production who sets the governmental price floor for gosum berries, in an effort to assist the gosum berry producers to have a higher income, set the price floor at $70 per barrel. These berries are a food staple of the Gondwanalandians and contributes directly to their health and long life (average lifespan of 150+ active years). In that particular year the amount of gosum berries produced at the $70 price floor was 700 barrels per month. To support the price of gosum berries, the Chairman of Production’s Office had to purchase 400 barrels per month. The accompanying diagram shows supply and demand curves illustrating the market for Gondwanaland gosum berries.

In the absence of a price floor, the maximum price that a few of the consumers are willing to pay up to $100 per barrel of gosum berries. The market equilibrium (E) price is $50 per barrel. How much consumer surplus is created, when there is no price floor? Show your calculations.
Response
equilibrium price is $50 and equilibrium quantity are 500consumer surplus =0.5(100-50) x500cs=0.5(50)x500cs=25x500cs=$12,500How much producer surplus when there is no price floor? Show your calculations.
Response
producer surplus (PS)=0.5(50-0) x500PS=0.5(50)x500PS=25x500PS=$12,500What is the total surplus when there is no price floor? Show your calculations.
Response
total surplus TS= consumer’ssurplus+producer surplusConsumer surplus=12,500
Producer surplus=12,500
=12500+12500=$25,000the total surplus as compouted above is $25,000 After the price floor is instituted, the legal minimum price that can be charged by suppliers is $70 per barrel. The maximum price that a few of the consumers are still willing to pay is $100 per barrel of gosum berries. With the price floor at $70 per barrel, consumers buy 300 barrels of gosum berries per month. How much consumer surplus is created with the price floor? Show your calculations.
Response
The consumer surplus is area under demand curve and market price line. consumer surplus (CS)=0.5(100-70) x300cs=0.5(30)x300cs=15x300cs=$4,500How much producer surplus is created with the price floor? Show your calculations.
Response
The producer surplus is the area under price line and supply curve.It can be computed as: producer surplus= 0.5(300×30) +(40×300)PS=0.5(9000) +(12000)PS=4500+12000PS=$16,500The Chairman of Production’s Office buys any barrels of gosum berries that the producers are not able to sell. With the price floor, the producers sell 300 barrels per month to consumers, but the producers, at this high price floor, produce 700 barrels per month. How much money does the Chairman of Production’s Office spend on buying up surplus gosum berries? Show your calculations.
Response
The amount of production is 700 barrels of gosum berries
Sales =300 barrels of gosum berries
The price floor or the cost per barrel of gosum berries is $70
Surplus amounts spent of g0sum berries= (Produced quantity-quantity demanded)*price floorAmounts spent on surpluses can be computed as = (700 barrels-300 barrels)*$70=400 unsold barrels *$70=$28,000The Emperor of Gondwanaland must collect taxes from the people to pay for the purchases of surplus gosum berries by the Chairman of Production’s Office. As a result, total surplus (producer plus consumer) is reduced by the amount the Chairman of Production’s Office spent on buying surplus gosum berries. Using your answers for parts d, e, and f, what is the total surplus when there is a price floor? Show your calculations.
Response
Krugman & Wells (2014) defines total surplus as the combination of the producer and the consumer surpluses and therefore, to calculate the total surplus (TS), the consumer surplus will be added to the producer surplus in the case and then make a provision of the taxes imposed upon the production office of the chairman to purchase surplus gosum berries.
From the above definition;
Total surplus= consumer surplus + producer surplus -taxes of buying excess berriesTotal surplus=($4,500+$24,500)-$28,000Total surplus= $29,000-$28,000Total surplus= $1,000If the price floor is set at $1,000 per month, it will cause a total surplus.
How does this compare to the total surplus without a price floor from part c?
Response
The comparison between the total surplus without price floor and the total surplus with price floor
It can be computed bydeducting the TS (with price floor) from the TS (without price floor)
=$25,000-$1000=$24,000Comparing the total surplus from c) above, the price floor causes a decline in the total surplus of montly by $24,000 for the gosum berries.
Reference
Krugman, P. & Wells, R. (2014). Microeconomics, 4th Ed. Worth Publishers: United States of America.
Content Percent Possible Points Possible
Full Assignment 100% 80
     
Overall Writing: 20% 16
Correct coversheet information at the top of 1st page 5% 4.00
APA format for answers 3% 2.40
Correct citations 3% 2.40
Standard English, no errors 4% 3.20
At least one, or more, references 5% 4.00
     
Answers: provides complete information demonstrating analysis and critical thinking: 80% 64
Individual Questions:    
a. – Calculate total consumer surplus with no price floor? 10% 8.00
b. – Calculate total producer surplus with no price floor? 10% 8.00
c. – Calculate total surplus with no price floors? 10% 8.00
d. – Calculate total consumer surplus with a $70 price floor? 10% 8.00
e. – Calculate total producer surplus with a $70 price floor? 10% 8.00
f. – How much must be paid to purchase the surplus berries? 10% 8.00
g. – Calculate total surplus with a $70 price floor? 10% 8.00
h. – How does the total surplus with a $70 price floor differ from no price floor? 10% 8.00