Question

Australia produces approximately 375 million kilograms of bananas annually with the vast majority of bananas grown in North Queensland. Australians consume 310 million kilograms of bananas at a market clearing price of $5/kg. Now, The banana industry successfully lobbies the government to implement a price floor of $9/kg on bananas. The quantity of bananas demanded falls to 200 million kilograms. At 200 million kilograms the opportunity cost of producing the last kg of bananas is $3. If the banana industry starts producing bananas as soon as the price goes above $0/kg, how much consumer surplus is converted to producer surplus when the price is increased from $5/kg to $9 per kg? $ million.

Answer 1

The market clearing price of bananas was $5 per kg.

The price floor fixed by the government was $9 per kg.

After the implementation of price floor, quantity demanded or quantity exchanged of bananas was 200 million kg.

Calculate the consumer surplus that got converted in to producer surplus -

Consumer surplus converted into producer surplus = 1/2 * (Price floor - market clearing price) * Quantity demanded after price floor

Consumer surplus converted into producer surplus = 1/2 * ($9 - $5) * 200 million = 1/2 * $4 * 200 million = $400 million

Thus,

The consumer surplus that is converted into producer surplus when the price is increased from $5/kg to $9/kg is $400 million.