Question

The US Farm Bill 2012 indicates that the domestic price of wheat will be maintained at $350 per tonne, which is above the market equilibrium level of $300 per tonne, in order to support for domestic wheat growers. At the market equilibrium, 100 tonnes are supplied.
(a) Is the wheat price control in the US a price floor or a price ceiling? (1 mark)
(b) On a graph, show and explain if the price control in the US creates a shortage or a surplus in the market for wheat. Assume that the US does not trade wheat internationally. (2 marks)
(c) Show on a graph and explain how the price control in the US changes consumer surplus, producer surplus, and deadweight loss in the domestic wheat market.

Answer 1

Answer on Question #42471, Economics, Microeconomics

$\mathrm{P} = \$ 350$ per ton, $\mathrm{Pe} = \$ 300$ per ton, $\mathrm{Qse} = 100$ ton.

(a) Such kind of wheat price control in the US, when $\mathrm{Pe} > \mathrm{P}$ is called a price floor.

(b) On a graph below we can see, that price floor in the US creates a surplus in the market for wheat, assuming that the US does not trade wheat internationally, because quantity supplied will be higher than quantity demanded.

(c) As we can see on the graph below price floor decreases consumer surplus, increases producer surplus and creates deadweight loss, because an excess supply appears after the increase of price.

(a)

(b)

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