Chapter 1. eFigure 3.9

100

Correct! Although producers would like to bring 30 million tons of peanuts to market, they recognize that the equilibrium amount of peanuts in the market is limited to the quantity that consumers are willing to purchase. Accordingly, these surplus peanuts are never produced. While the government does set the price floor, the minimum legal price at which the peanuts can be sold, they do no directly restrict the quantity that is grown.

Incorrect. Although producers would like to bring 30 million tons of peanuts to market, they recognize that the equilibrium amount of peanuts in the market is limited to the quantity that consumers are willing to purchase. Accordingly, these surplus peanuts are never produced. While the government does set the price floor, the minimum legal price at which the peanuts can be sold, they do no directly restrict the quantity that is grown.

100

Correct! Consumer surplus would continue to shrink. As the price continues to rise, fewer consumers purchase peanuts and the area measuring consumer surplus, the triangle, would have both a smaller base and a smaller height. In this case, it would be reduced to a fraction of area A.

Incorrect. Consumer surplus would continue to shrink. As the price continues to rise, fewer consumers purchase peanuts and the area measuring consumer surplus, the triangle, would have both a smaller base and a smaller height. In this case, it would be reduced to a fraction of area A.

100

Correct! From the graph and the discussion, we know that consumer surplus has obviously decreased. Initially consumer surplus is measured by areas A + B + C, and following the imposition of the price floor, consumer surplus is reduced to only area A. Producer surplus is less obvious. Initially producer surplus is measured by areas D + E + F, and following the imposition of the price floor, producer surplus is reduced to areas B + D + F. Accordingly, the question becomes which is larger, B or E? In this case, we can calculate the area of the two to make the determination. B is a rectangle with height $250 (the difference between 750 and 500), and length 10, giving B area $2500. Area E is a triangle, with area (1/2)(base)(height). In this case, the base measures 10 and the height is $250. Accordingly, the area of triangle E is $1250, and producers are better off (greater producer surplus) under the price floor. It is important to note that this may not always be the case, and a comparison of the two is always required.

Incorrect. From the graph and the discussion, we know that consumer surplus has obviously decreased. Initially consumer surplus is measured by areas A + B + C, and following the imposition of the price floor, consumer surplus is reduced to only area A. Producer surplus is less obvious. Initially producer surplus is measured by areas D + E + F, and following the imposition of the price floor, producer surplus is reduced to areas B + D + F. Accordingly, the question becomes which is larger, B or E? In this case, we can calculate the area of the two to make the determination. B is a rectangle with height $250 (the difference between 750 and 500), and length 10, giving B area $2500. Area E is a triangle, with area (1/2)(base)(height). In this case, the base measures 10 and the height is $250. Accordingly, the area of triangle E is $1250, and producers are better off (greater producer surplus) under the price floor. It is important to note that this may not always be the case, and a comparison of the two is always required.