The U.S. Department of Agriculture (USDA) administers the price floor for milk, set at $0.10 per pound of milk. (The price floor is officially set at $9.90 per hundred weight of milk. One hundredweight is 100 pounds.) At that price, according to data from the USDA, the quantity of milk produced in 2003 by U.S. producers was 170 billion pounds, and the quantity demanded was 169 billion pounds. To support the price of milk at the price floor, the USDA had to buy up 1 billion pounds of milk. The accompanying diagram shows supply and demand curves illustrating the market for milk.
In the absence of a price floor, calculate how much consumer surplus, producer
surplus, and total surplus are created. Draw a graph and illustrate the areas that
represents consumer surplus and producer surplus.
b) With the price floor at $0.10 per pound of milk, consumers buy 169 billion
pounds of milk. How much consumer surplus is created now?
c) With the price floor at $0.10 per pound of milk, producers sell 170 billion pounds
of milk (some to consumers and some to the USDA). How much producer surplus
is created now? Draw a graph and illustrate the areas that represents consumer
surplus and producer surplus in this circumstance.
d) How much money does the USDA spend on buying up surplus milk?
e) Taxes must be collected to pay for the purchases of surplus milk by the USDA. As
a result, total surplus (producer plus consumer) is reduced by the amount the
USDA spent on buying surplus milk. Using your answers for parts b-d, calculate
the total surplus when there is a price floor? How does this compare to the total
surplus without a price floor from part a?