Answer to Question #277498 in Macroeconomics for argho

Question

Suppose, the government has decided that the free-market price of sugar is too low.

Government has imposed a binding price floor of per kg sugar at 60 taka, whereas,

the market price was 50 taka per kg before the announcement.

a. Explain the effects of this flooring price on the demand and supply of the sugar

market. In your graph, show the effects of the price changes on quantity

demanded and quantity supplied. Does it create excess supply or excess

demand? What will happen to the market price?

b. In the above situation, who (buyers or sellers) is going to get the benefit from

such policy? Explain it in your own words (clue: use a graph where a Price

flooring is binding).

Answer 1

a. When the government sets a price floor of 60 taka above the equilibrium price of 50 taka, quantity demanded by sugar buyers will decrease since sugar becomes more expensive. On the other hand, the price floor being above the equilibrium price, sellers will increase amount supplied to the market to maximiize profits. As a result, the quantity supplied in the market will be higher than quantity demanded leading to excess supply in the sugar market.

b. Sellers will benefit from the policy. The sellers are willing to sell sugar at 50 taka per kg but the price floor set by the government enables them to sell at a higher price of 60 per kg earning them a surplus of 10 taka per kg of sugar sold.