Question

Question 1 1.1. If a price floor were imposed on a competitive market, what would be the effect on the producer surplus and total economic surplus areas? (Use a typical demand-supply curve diagram in your answer.)

1.2. Explain why the slope of the demand curve is important to determining the effect of the price floor on the change in the size of consumer surplus area. (You can use a diagram if you wish.)

1.3. Describe a situation where you think the imposition of a price floor would be acceptable.

Answer 1

Answer 1. 1.1

Binding price floor is imposed on price level above equilibrium price, So Pp is the price floor. This leads to fall in equilibrium Quantity from Qe to Qp.

Producer surplus rises and total economic surplus falls due to the inefficient Equilibrium quantity and Deadweight loss.

Answer 1.2. If the demand curve is more elastic it will be flatter and any rise in price due to price floor will lead to more fall in equilibrium Quantity. Hence consumer surplus will fall by a greater amount.

Similarly, inelastic demand will have steeper demand curve and fall in consumer surplus will be less.

Answer- 1.3. Price floor is acceptable in case of minimum wages. Minimum wages are a type of price floor which are set above the equilibrium wage rate and helps the workera get higher than equilibrium wages.