
Concept explainers
a.
The
Introduction: Consumer surplus refers to the additional profit a consumer gets due to the difference between the price of a commodity in the market and the price a consumer is ready to give for a particular commodity at a given period of time.
Producer surplus on the other hand is the additional surplus of the producers due to the difference in the price of a good at which the producer wants to the supply with the prices the consumers are ready to pay for a commodity in the market at a particular period of time.
Total surplus is the total sum of the consumer as well as the producer surplus in an economy in a given period of time. Total surplus is also referred to as the economic surplus.
Price floor refers to the minimum prices decided by the government of a country so as to minimize the change in the price of commodities.

Explanation of Solution
The diagram given below depicts the quantity demanded and quantity supplied of butter in billion pounds:
The consumer surplus in the absence of
Formula to calculate consumer surplus is as follows:
Substitute, $0.25 for the price above equilibrium, 0.15 for equilibrium price and $200 for the
Hence, consumer surplus is $10 billion.
Similarly, producer surplus can be calculated with the area above the supply curve but below the equilibrium prices.
Formula to calculate producer surplus is as follows:
Substitute 0.15 for the equilibrium price, 0.05 for the price below equilibrium price and $200 billion for equilibrium quantity demanded in the above formula,
Hence, producer surplus is $10 billion.
Thus, formula to calculate total surplus is as follows:
Substitute $10 billion for consumer surplus and $10 billion for producer surplus in the formula.
Hence, the total surplus is $20 billion.
b.
Consumer surplus if price floor is at $0.18 and consumer buy 140 billion pounds of milk.

Explanation of Solution
If price floor is set at $0.18 per pound, the consumer will purchase at the prices above the price floor but below the maximum price level that is $0.25 as shown in the figure 1.
The formula to calculate consumer surplus as per this explanation is as follows:
Substitute $0.25 for the maximum price, $0.18 for the floor price and 200 billion for the equilibrium quantity in the above formula,
Hence, the consumer surplus is $47 billion.
c.
The amount of producer surplus if price floor is at $0.18 per pound of milk and producers tend to sell 240 billion pounds of milk.

Explanation of Solution
With the price floor set, the producers tend to fix the sale of milk at 240 billion pounds. With this increased quantity more than the equilibrium quantity that was 1.65 billion.
Formula to calculate producer surplus is as follows:
Substitute 0.18 for floor price, 0.05 for lowest price and 240 billion for sales in the formula.
Hence, the producer surplus is $15.6 billion.
d.
The money spent by the USDA (U.S. Department of Agriculture) to buy surplus milk.

Explanation of Solution
The USDA has to buy 240 million pounds of milk.
Formula to calculate the money spends to buy 240billion pounds of milk is as follows:
Substitute, 0.18 for floor price and 240 billion for sales volume in the formula,
Hence, the amount of money spent is $43.2 billion.
e.
The total surplus in case of price floor and analyze the difference in the total surplus with price without a price floor.

Explanation of Solution
In case price floor is set by the government, the formula to calculate total surplus is as follows:
Substitute, 47 Billion for consumer surplus, $15.6 Billion for producer surplus and $43.2 Billion for the money spent in the formula,
Hence, the total surplus is $19.4 billion.
The total surplus in an economy when price floor is set by the government is less as compared to the total surplus before the advent of price floor. This is because of the reduction in both the producer as well as the consumer surplus in the economy.
Want to see more full solutions like this?
- Sue is a sole proprietor of her own sewing business. Revenues are $150,000 per year and raw material (cloth, thread) costs are $130,000 per year. Sue pays herself a salary of $60,000 per year but gave up a job with a salary of $80,000 to run the business. ○ A. Her accounting profits are $0. Her economic profits are - $60,000. ○ B. Her accounting profits are $0. Her economic profits are - $40,000. ○ C. Her accounting profits are - $40,000. Her economic profits are - $60,000. ○ D. Her accounting profits are - $60,000. Her economic profits are -$40,000.arrow_forwardSelect a number that describes the type of firm organization indicated. Descriptions of Firm Organizations: 1. has one owner-manager who is personally responsible for all aspects of the business, including its debts 2. one type of partner takes part in managing the firm and is personally liable for the firm's actions and debts, and the other type of partner takes no part in the management of the firm and risks only the money that they have invested 3. owners are not personally responsible for anything that is done in the name of the firm 4. owned by the government but is usually under the direction of a more or less independent, state-appointed board 5. established with the explicit objective of providing goods or services but only in a manner that just covers its costs 6. has two or more joint owners, each of whom is personally responsible for all of the partnership's debts Type of Firm Organization a. limited partnership b. single proprietorship c. corporation Correct Numberarrow_forwardThe table below provides the total revenues and costs for a small landscaping company in a recent year. Total Revenues ($) 250,000 Total Costs ($) - wages and salaries 100,000 -risk-free return of 2% on owner's capital of $25,000 500 -interest on bank loan 1,000 - cost of supplies 27,000 - depreciation of capital equipment 8,000 - additional wages the owner could have earned in next best alternative 30,000 -risk premium of 4% on owner's capital of $25,000 1,000 The economic profits for this firm are ○ A. $83,000. B. $82,500. OC. $114,000. OD. $83,500. ○ E. $112,500.arrow_forward
- Output TFC ($) TVC ($) TC ($) (Q) 2 100 104 204 3 100 203 303 4 100 300 400 5 100 405 505 6 100 512 612 7 100 621 721 Given the information about short-run costs in the table above, we can conclude that the firm will minimize the average total cost of production when Q = (Round your response to the nearest whole number.)arrow_forwardThe following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. Assume that the wage per unit of labour is $20 and the cost of the capital is $100. Labour per unit of time 0 1 Total Output 0 25 T 2 3 4 5 75 137 212 267 The marginal product of labour is at its maximum when the firm changes the amount of labour hired from ○ A. 0 to 1 unit. ○ B. 3 to 4 units. OC. 2 to 3 units. OD. 1 to 2 units. ○ E. 4 to 5 units.arrow_forwardThe table below provides the annual revenues and costs for a family-owned firm producing catered meals. Total Revenues ($) 600,000 Total Costs ($) - wages and salaries 250,000 -risk-free return of 7% on owners' capital of $300,000 21,000 - rent 101,000 - depreciation of capital equipment 22,000 -risk premium of 9% on owners' capital of $300,000 27,000 - intermediate inputs 146,000 -forgone wages of owners in alternative employment -interest on bank loan 70,000 11,000 The implicit costs for this family-owned firm are ○ A. $70,000. OB. $97,000. OC. $589,000. OD. $118,000. ○ E. $48,000.arrow_forward
- Suppose a production function for a firm takes the following algebraic form: Q= 2KL - (0.3)L², where Q is the output of sweaters per day. Now suppose the firm is operating with 10 units of capital (K = 10) and 6 units of labour (L = 6). What is the output of sweaters? A. 64 sweaters per day OB. 49 sweaters per day OC. 109 sweaters per day OD. 72 sweaters per day OE. 118 sweaters per dayarrow_forward3. Consider a course allocation problem with strict and non-responsive preferences. Isthere a mechanism that is efficient and strategy-proof? If so, state the mechanismand show that it satisfies efficiency and strategyproofness. {hint serial dictatorship and show using example}4. Consider a course allocation problem with responsive preferences and at least 3students. Is there a mechanism that is efficient and strategy-proof that is not theSerial Dictatorship? If so, state the mechanism and show that it satisfies efficiencyand strategyproofness.5. Suggest a mechanism for allocating students to courses in a situation where preferences are non-responsive, and study its properties (efficiency and strategyproofness). Please be creativearrow_forward3. Consider a course allocation problem with strict and non-responsive preferences. Isthere a mechanism that is efficient and strategy-proof? If so, state the mechanismand show that it satisfies efficiency and strategyproofness. {hint serial dictatorship}4. Consider a course allocation problem with responsive preferences and at least 3students. Is there a mechanism that is efficient and strategy-proof that is not theSerial Dictatorship? If so, state the mechanism and show that it satisfies efficiencyand strategyproofness.5. Suggest a mechanism for allocating students to courses in a situation where preferences are non-responsive, and study its properties (efficiency and strategyproofness). Please be creativearrow_forward
- Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSONEngineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
- Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage LearningManagerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education





