Principles_HWsolution_ch6

Principles_HWsolution_ch6 - Suggested Answers for Mankiw,...

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1 Suggested Answers for Mankiw, Chapter 6, Problem 2, 7, 11 2. a. The imposition of a binding price floor in the cheese market is shown in Figure 3. In the absence of the price floor, the price would be P 1 and the quantity would be Q 1 . With the floor set at P f , which is greater than P 1 , the quantity demanded is Q 2 , while quantity supplied is Q 3 , so there is a surplus of cheese in the amount Q 3 Q 2 . b. The farmers’ complaint that their total revenue has declined is correct if demand is elastic. With elastic demand, the percentage decline in quantity would exceed the percentage rise in price, so total revenue would decline. c. If the government purchases all the surplus cheese at the price floor, producers benefit and taxpayers lose. Producers would produce quantity Q 3 of cheese, and their total revenue would increase substantially. However, consumers would buy only quantity Q 2 of cheese, so they are in the same position as before. Taxpayers lose because they would be
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Principles_HWsolution_ch6 - Suggested Answers for Mankiw,...

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