Price Floors
Supplemental Instruction
Iowa State University
Leader:
Course:
Instructor:
Date:
Veronica
Econ 101
Kreider
10-6-14
1. Define:
a. Price floor: A government-imposed minimum price in a market
b. Surplus: An excess supply not eliminated by a fall in price, so that quantity supplied
continues to exceed quantity demanded.
2. Suppose the market for rice has the following supply and demand schedules:
P (per ton)
QD (tons)
QS (tons)
$10
100
0
$20
80
30
$30
60
40
$40
50
50
$50
40
60
To support rice producers, the government imposes a price floor of $50 per ton.
a. What quantity will be traded in the market? Why?
40
b. What is the deadweight loss?
2* ½ * 5 * 10 = 50
c. What must the government do to keep a price floor in place? What happens if the
government doesn’t do this? buy up the excess supply itself, impose strict limits on
imports or pay farmers not to produce. If the don’t do this suppliers will go out of
business and the supply curve will eventually shift leftward.
d. What happens if technology improvements occur while a price floor is in effect?
Increase dead weight loss and increase surplus.
e. Is it sensible for the government to instead make the price floor at $20 per ton? Why
or why not?
No because its non binding and will be at the equilibrium anyway
f. Is it sensible for the government to instead enforce a price ceiling at $50 per ton?
Why or why not?
No because its non binding and will be at the equilibrium anyway
3. Price ceilings above the equilibrium
4. Price ceilings _______ economic
price and price floors below the
efficiency and a price floors
equilibrium price will both lead to
______economic efficiency.
a) black markets
a) achieve; do not achieve
b) an increase in production but a
b) do not achieve; achieve
fall in consumption
c) do not achieve; do not achieve
c) a reduction in quantity
d) achieve; achieve
exchanged
e) None of the above
d) no change in production or
consumption
5. Fill in the blank: A price floor creates a surplus of a good. In order to maintain the price
floor, the government must prevent the surplus from driving down the market price. In
practice, the government often accomplishes this goal by purchasing the surplus itself.
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