Chapter 4, Problem 15QP

(a)

To determine

Calculate the consumer surplus.

Explanation of Solution

The consumer surplus can be calculated using the general formula as given below:

$\text{Consumer surplus}=\frac{1}{2}\times \left(\text{Maximum willing price}-\text{Equilibrium price}\right)\times \text{Quantity}$ (1)

Substitute the respective values in Equation (1).

$\begin{array}{c}\text{Consumer surplus}=\frac{1}{2}\times \left(30-15\right)\times 6,000\\ =\frac{1}{2}\times 15\times 6,000\\ =45,000\end{array}$

Thus, the consumer surplus is $45,000.

Economics Concept Introduction

Consumer surplus: It is the difference between the highest willing price of the consumer and the actual price that the consumer pays.

(b)

To determine

Calculate producer surplus.

Explanation of Solution

The producer surplus when the equilibrium price is 15 and quantity is 6,000 can be calculated as given below:

$\text{Producer surplus}=\frac{1}{2}\times \left(\text{Equilibrium price}-\text{Minimum willing price}\right)\times \text{Quantity}$ (2)

Substitute the values in Equation (2).

  $\begin{array}{c}\text{Producer surplus}=\frac{1}{2}\times \left(15-6\right)\times 6,000\\ =\frac{1}{2}\times 9\times 6,000\\ =27,000\end{array}$

Thus, the producer surplus is $27,000.

Economics Concept Introduction

Producer surplus: It is the difference between the lowest willing to accept price by the producer and the actual price received by the producer.

(c)

To determine

The new consumer surplus when the government imposes price floor.

Explanation of Solution

The new consumer surplus can be calculated using Equation (3) as given below:

$\text{New consumer surplus}=\frac{1}{2}\times \left(\text{Maximum willing price}-\text{Floor price}\right)\times \text{New quantity}$ (3)

$\begin{array}{c}\text{New consumer surplus}=\frac{1}{2}\times \left(30-20\right)\times 4,000\\ =\frac{1}{2}\times 10\times 4,000\\ =20,000\end{array}$

Thus, the new consumer surplus is 20,000.

Economics Concept Introduction

Price floor: A price floor is defined as the minimum price usually fixed by the Government below which the products are not sold in the market.

Consumer surplus: It is the difference between the highest willing price of the consumer and the actual price that the consumer pays.

(d)

To determine

Calculate the new producer surplus when the price floor imposed by the government.

Explanation of Solution

The new producer surplus when the government imposes price floor can be depicted as the shaded area given in Figure 1. It is the area below the floor price and above the supply curve minus dead weight loss.

New producer surplus can be calculated with the help of the new equilibrium price and minimum willing price along with the new equilibrium quantity. In the above figure, the quantity at price floor $20 is 4,000 units. The minimum willingness of corresponding producer to accept price is $\left({\text{Price}}_{\text{MAPC}}\right)$ $12.  Producer’s minimum willingness to accept price $\left({\text{Price}}_{\text{MAP}}\right)$ is $6. New producer surplus can be calculated as follows:

$\begin{array}{c}\text{New producer surplus}=\left(\left({\text{Price}}_{\text{Floor}}-{\text{Price}}_{\text{MAPC}}\right)\times \text{Quantity}\right)+\left(\frac{1}{2}\times \left({\text{Price}}_{\text{MAPC}}-{\text{Price}}_{\text{MAP}}\right)\times \text{Quantity}\right)\\ =\left(\left(20-12\right)\times 4,000\right)+\left(\frac{1}{2}\times \left(12-6\right)\times 4,000\right)\\ =\left(8\times 4,000\right)+\left(\frac{1}{2}\times 6\times 4,000\right)\\ =32,000+12,000\\ =44,000\end{array}$

Thus, the new producer surplus is $44,000.

Economics Concept Introduction

Price floor: A price floor is defined as the minimum price usually fixed by the government below which the products are not sold in the market.

Producer surplus: It is the difference between the lowest willing to accept price by the producer and the actual price received by the producer.

(e)

To determine

Price floor is supported mostly by the consumers or producers.

Explanation of Solution

Price floor is the minimum support price imposed by the government for the benefits of producers. Price floor is generally imposed on agricultural products, which ensures a minimum price for their product.  Moreover, the price floor guarantees the minimum wage law, for better living. 

Economics Concept Introduction

Price floor: A price floor is defined as the minimum price usually fixed by the government and below this, the products are not sold in the market.