Question

consider the graph below.

what happened to the market when the government imposed a minimum price of \\$5.50 for corn?

a.) consumers and producers both benefit from the \\$5.50 minimum price.
b.) producer surplus is now zero.
c.) a deadweight loss is created.
d.) a larger consumer surplus is created.

Explanation:

🆕 New Concept Discovered: Price Floors and Market Welfare
How government-mandated minimum prices create market inefficiencies.

Step 1: Analyze the Market Equilibrium

Before any government intervention, the market equilibrium is determined by the intersection of the Demand and Supply curves:

• The equilibrium price is \( \$4.50 \).
• The equilibrium quantity is \( 3 \) million bushels.

At this equilibrium, total economic surplus (the sum of consumer surplus and producer surplus) is maximized, and there is no deadweight loss.

Step 2: Analyze the Impact of the Minimum Price

The government imposes a minimum price (price floor) of \( \$5.50 \):

• Because this minimum price is set above the equilibrium price of \( \$4.50 \), it is a binding price floor.
• At \( \$5.50 \), consumers are only willing to buy \( 1.5 \) million bushels (the quantity demanded), while producers want to supply more.
• Because transactions must be mutually agreed upon, the actual quantity traded in the market falls from \( 3 \) million bushels to \( 1.5 \) million bushels.

Step 3: Identify the Resulting Welfare Changes

Because the quantity traded decreases from the socially optimal level of \( 3 \) million bushels to \( 1.5 \) million bushels:

• Some mutually beneficial transactions that would have occurred between \( \$4.50 \) and \( \$5.50 \) are prevented.
• This reduction in transactions creates a loss in total economic surplus that is not captured by anyone.
• This lost economic efficiency is represented by the shaded triangular area labeled Deadweight Loss on the graph.

Let's evaluate the given options:

• a.) Consumers and producers both benefit...: Incorrect. Consumers are worse off because they pay a higher price and consume less.
• b.) Producer surplus is now zero: Incorrect. The graph shows a red shaded region representing a positive producer surplus.
• c.) A deadweight loss is created: Correct. The restriction in quantity traded directly generates a deadweight loss.
• d.) A larger consumer surplus is created: Incorrect. Consumer surplus shrinks to the small green triangle because consumers pay a higher price for fewer goods.

Answer:

c.) A deadweight loss is created.