10 marks The market demand and supply functions for milk are

(10 marks) The market demand and supply functions for milk are: QD = 14 2P

and QS = 1+P. If a price floor of $6 is implemented, calculate the change in

producer surplus. How many surplus units of milk are being produced? If the government purchases all the excess units at $6, calculate the milk expenditures by government?

Solution

QD = 14 2P

QS = 1+P

The equilibrium condition are;

14 2P= 1+P

2P+P=14+1

3P=15

P=15/3

P=$5

substituting P into demand equation

QD = 14 2(5)

QD=14-10

=4 units

Producer surplus= area of triangle

=1/2*B*H

=0.5*4*5

=$10

Since the price floor is $6, so the total supply is at this price floor

QS = 1+P

QS = 1+6

=5 units

The new producer surplus= area of triangle

=1/2*B*H

=0.5*5*6

=$15

Change in producer surplus=$15-$10

=$5

The surplus unit of production is =5-4

=1 units

Since the excess quantity is 1 units and government purchases it at price of $6 per units. So the total government expenditure on milk will be=price * excess quantity

=$6*1

=$6