The government has decided that the free-market price of cheese is too low. Suppose the
government imposes a binding price floor in the cheese market.
- a) Use a supply-and demand diagram to show the effect of this policy on the price of
cheese and the quantity of cheese sold. (3 marks)
- b) Is there a shortage or surplus of cheese? (1 mark)
- c) Farmers complain that the price floor has reduced their total revenue. Is this
possible? Explain. (2 marks)
- d) In response to farmers’ complaints, the government agrees to purchase all of the
surplus cheese at the price floor. Who benefits from this new policy? Who loses?
Explain. (4 marks)