Unit 6 Assignment Template Name Course Number Section

Unit 6 Assignment Templatename Course Number Section Number U

Suppose that the U.S. Department of Agriculture (USDA) administers the price floor for cheese, set at $0.17 per pound of cheese. (In real life the actual price floor was officially set at $16.10 per hundredweight of cheese. One hundredweight is 100 pounds.) At that price, according to data from the USDA, the quantity of cheese produced in 2009 by U.S. producers was 212.5 billion pounds, and the quantity demanded was 211 billion pounds. To support the price of cheese at the price floor, the USDA had to buy up 1.5 billion pounds of cheese. The accompanying diagram shows supply and demand curves illustrating the market for cheese.

Paper For Above instruction

Understanding price controls such as price floors and their effects on markets is a fundamental aspect of microeconomics. This analysis will explore the concepts of consumer surplus, producer surplus, and total surplus in the context of the cheese market, both in a free market situation and with government intervention via a price floor implemented by the USDA.

In a typical free market, the equilibrium price is where supply equals demand, maximizing total surplus—the sum of consumer and producer surplus. According to the data provided, the market equilibrium price for cheese is $0.13 per pound. At this equilibrium, consumers willing to pay up to $0.20 per pound derive consumer surplus, which is the difference between what they are willing to pay and the market price, summed across all units traded. Producers are willing to sell at a minimum price of $0.06 per pound, and their producer surplus is the difference between the market price and their minimum price for all units sold.

Calculating the consumer surplus in a market without a price floor involves the area of a triangle represented by the difference between the maximum willingness to pay ($0.20) and the actual market price ($0.13), multiplied by the quantity traded (211 billion pounds), divided by two. This yields:

Consumer Surplus = 0.5 × (0.20 - 0.13) × 211 billion = 0.5 × 0.07 × 211 billion ≈ $7.385 billion

Similarly, the producer surplus in a free market is calculated as the area of a triangle bounded by the difference between the market price ($0.13) and the minimum price producers are willing to accept ($0.06), times the quantity (211 billion pounds), divided by two:

Producer Surplus = 0.5 × (0.13 - 0.06) × 211 billion = 0.5 × 0.07 × 211 billion ≈ $7.385 billion

The total surplus in the absence of a price floor is the sum of consumer and producer surpluses:

Total Surplus = $7.385 billion + $7.385 billion = approximately $14.77 billion

When a price floor is set at $0.17 per pound, above the market equilibrium, the market experiences distortions. At this price floor, consumer willingness to pay up to $0.20 per pound means consumers continue to buy 211 billion pounds of cheese—since the quantity demanded at the price floor is given as such—though potentially less than the quantity producers are willing to supply. Consumers' consumer surplus with the price floor becomes the area of a triangle with the maximum willingness to pay ($0.20) and the actual price ($0.17):

Consumer Surplus = 0.5 × (0.20 - 0.17) × 211 billion = 0.5 × 0.03 × 211 billion ≈ $3.165 billion

Regarding producer surplus, at the price floor of $0.17, some producers are willing to supply more than consumers are willing to buy. The problem states that producers sell 212.5 billion pounds; thus, the surplus cheese is 1.5 billion pounds (212.5 - 211) which is bought up by the USDA. The producer surplus is now calculated as the difference between the price floor and producers' minimum willingness to sell ($0.06), multiplied by the quantity sold (212.5 billion pounds), divided by two, since the supply curve is typically upward sloping and the surplus triangle is between these prices:

Producer Surplus = 0.5 × (0.17 - 0.06) × 212.5 billion = 0.5 × 0.11 × 212.5 billion ≈ $11.693 billion

The USDA's expenditure on surplus cheese is the amount paid for the excess cheese that the market would not have purchased at the price floor—specifically, the surplus quantity (1.5 billion pounds)—multiplied by the price floor of $0.17 per pound:

USDA’s expenditure = 1.5 billion pounds × $0.17 = $255 million

This expenditure represents the cost for the government to purchase the surplus cheese to maintain the price floor, which effectively results in a deadweight loss. The total surplus in the market, considering the subsidy expenditure, is then reduced by this amount, as the transaction does not create value beyond the cost absorbed by the USDA.

Calculating total surplus with the price floor involves adding the consumer and producer surpluses and subtracting the cost paid by the USDA for surplus cheese. The adjusted total surplus is:

Total Surplus = Consumer Surplus + Producer Surplus - USDA expenditure = $3.165 billion + $11.693 billion - $0.255 billion ≈ $14.603 billion

Compared to the total surplus without a price floor ($14.77 billion), the surplus decreases marginally because of the government expenditure on surplus cheese, indicating a deadweight loss due to market intervention.

This analysis demonstrates how government price controls can distort market efficiencies, leading to a loss in total surplus despite protecting certain producers and consumers. These distortions exemplify the trade-offs involved in policymaking aimed at stabilizing markets but often at a cost of overall economic welfare.

References

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• US Department of Agriculture (USDA). (2009). Annual Report on the U.S. Dairy Industry.
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