Homework 2 KEY-2 - Econ 201 Homework 2 KEY(due Wednesday...

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P’ P P* D S Q Q* Price Floor Q’ Econ 201 – Homework 2 KEY (due Wednesday, February 10 th ) 1. Consider the market for corn. a) Draw the market for corn and be sure to label carefully and completely the axes, curves, and equilibrium price and quantity. b) If the market for corn were a competitive market, would you expect there to be any deadweight loss? No, in a competitive market with a price that is allowed to freely adjust, the “invisible hand” will help self-interested individuals maximize total welfare by bringing the market to an equilibrium with no deadweight loss. c) Now, consider the effects of a price floor on agricultural goods (like corn) instituted by the government to protect farmers. Assuming the graph you drew in part a is for a year in which the set price floor would be effective , draw the price floor and the resulting price of corn and quantity that would be sold on your graph from part a. At the resulting price of corn, would there be a shortage or a surplus of corn? At the resulting price (P’), there would be a surplus of corn because the quantity supplied is greater than the quantity demanded at that price. d) On your graph, shade in and clearly label the consumer surplus after the price floor is implemented. Compared to the free-market situation, did the price floor cause consumer surplus to increase, decrease, or stay the same? The resulting consumer surplus is shaded in with yellow on the graph. The price floor caused consumer surplus to decrease.
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