Unit 6 Bu224 Microeconomic-Assignment: Price Floor
General Instructions for all Assignments
1. Unless specified differently by your course instructor, save this assignment template to your computer with the following file naming format: Course number_section number_Last_First_unit number
2. At the top of the template, insert the appropriate information: Your Name, Course Number and Section, and the Date
3. Insert your answers below, or in the appropriate space provided for in the question. Your answers should follow APA format with citations to your sources and, at the bottom of your last page, a list of references. Your answers should also be in Standard English with correct spelling, punctuation, grammar, and style (double spaced, in Times New Roman, 12–point, and black font). Respond to questions in a thorough manner, providing specific examples of concepts, topics, definitions, and other elements asked for in the questions.
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5. Any questions about the Assignment, or format questions, should be directed to your course instructor.
In this Assignment, you will be assessed on the following outcome:
BU224-2: Examine changes in price and quantity caused when governments take actions to modify market outcomes.
In a perfectly competitive market, the equilibrium price and quantity represent the most efficient operation of that market. Optimum efficiency means that sellers cannot be made better off without, at the same time, making buyers worse off, and that buyers cannot be made better off, without making the sellers worse off. This Assignment presents a scenario in which a government tries to improve the financial position of the sellers, in such a perfectly competitive market, by instituting a legal price floor that is significantly above the equilibrium price. A price floor is the lowest price for which a seller can legally sell the product.
In this Assignment, you will focus on calculating the consumer surplus, producer surplus and total surplus both before a price floor is established and after a price floor is enacted. You will also demonstrate an understanding of the impact on the entire economy, based on any changes in taxes required, if the government is to purchase any extra product that is not sold to consumers.
Suppose that the Gondwanaland Chairman of Production who sets the governmental price floor for gosum berries, in an effort to assist the gosum berry producers to have a higher income, set the price floor at $70 per barrel. These berries are a food staple of the Gondwanalandians and contributes directly to their health and long life (average lifespan of 150+ active years). In that particular year the amount of gosum berries produced at the $70 price floor was 700 barrels per month. To support the price of gosum berries, the Chairman of Production’s Office had to purchase 400 barrels per month. The accompanying diagram shows supply and demand curves illustrating the market for Gondwanaland gosum berries.
a. In the absence of a price floor, the maximum price that a few of the consumers are willing to pay up to $100 per barrel of gosum berries. The market equilibrium (E) price is $50 per barrel. How much consumer surplus is created, when there is no price floor? Show your calculations.
b. How much producer surplus when there is no price floor? Show your calculations.
c. What is the total surplus when there is no price floor? Show your calculations.
d. After the price floor is instituted, the legal minimum price that can be charged by suppliers is $70 per barrel. The maximum price that a few of the consumers are still willing to pay is $100 per barrel of gosum berries. With the price floor at $70 per barrel, consumers buy 300 barrels of gosum berries per month. How much consumer surplus is created with the price floor? Show your calculations.
e. How much producer surplus is created with the price floor? Show your calculations.
f. The Chairman of Production’s Office buys any barrels of gosum berries that the producers are not able to sell. With the price floor, the producers sell 300 barrels per month to consumers, but the producers, at this high price floor, produce 700 barrels per month. How much money does the Chairman of Production’s Office spend on buying up surplus gosum berries? Show your calculations.
g. The Emperor of Gondwanaland must collect taxes from the people to pay for the purchases of surplus gosum berries by the Chairman of Production’s Office. As a result, total surplus (producer plus consumer) is reduced by the amount the Chairman of Production’s Office spent on buying surplus gosum berries. Using your answers for parts d, e, and f, what is the total surplus when there is a price floor? Show your calculations.
h. How does this compare to the total surplus without a price floor from part c?
Unit 6 Grading Rubric
Correct coversheet information at the top of 1st page
APA format for answers
Standard English, no errors
At least one, or more, references
Answers: provides complete information demonstrating analysis and critical thinking:
a. – Calculate total consumer surplus with no price floor?
b. – Calculate total producer surplus with no price floor?
c. – Calculate total surplus with no price floors?
d. – Calculate total consumer surplus with a $70 price floor?
e. – Calculate total producer surplus with a $70 price floor?
f. – How much must be paid to purchase the surplus berries?
g. – Calculate total surplus with a $70 price floor?
h. – How does the total surplus with a $70 price floor differ from no price floor?