Question

Suppose the government wants to increase the incomes of pecan farmers and decides to impose a price floor on pecans. Is this program more likely to meet the government’s objective when price elasticity of demand for pecans is elastic or inelastic? Qualitatively, how will consumer, producer, and total surplus be affected if demand is inelastic? Explain.

Answer 1

Ans) Price floor is legal minimum price that must be paid for any product. A binding price floor is above the equilibrium price.

So, price floor will be beneficial only if demand for pecan is inelastic. Because only then, increasing price will not affect quantity demanded much and hence, will not result in loss.

If demand were to be elastic, price increase will reduce quantity demanded significantly and hence resulting in great loss for farmers.

When demand is inelastic, consumer surplus will decrease, producer surplus will increase and total surplus will decrease as a result of price floor.