Question

Consider the market for good Y when the supply and demand for this good follow the equations P = Q and P = -Q + 3. After imposing $2 price floor, what will be the producer surplus?

Group of answer choices

0.5

1

3

1.5

Answer 1

Supply equation: P=Q

Here when Q=0, Pm= 0

Demand equation: P= 3-Q

P	0	3
Q	3	0

If price floor is set at Pf=2

Quantity demand: Q*= 3-Pf= 3-2= 1

At Q=1, producer expect to get Price= Ps=1

Producer surplus is the area above supply curve and below price floor.

In the graph below, Area in blue is producer surplus.

Producer surplus= (Pf-Ps)(Q*)+(1/2)(Ps-0)(Q*)= (2-1)(1)+(1/2)(1)(1)= 1+(1/2)= 3/2= 1.5

Producer surplus= 1.5