Unit 4
[Microeconomics]
Unit 4 Assignment: Problem 1 & 2
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Course Number:
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Date:
-4
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Problem 1
Suppose that the U.S. Department of Agriculture (USDA) administers the price floor for cheese, set at
$0.17 per pound of cheese. (In real life, the actual price floor was officially set at $16.10 per
hundredweight of cheese. One hundredweight is 100 pounds.) At that price, according to data from
the USDA, the quantity of cheese produced in 2009 by U.S. producers was 212.5 billion pounds, and
the quantity demanded was 211 billion pounds. To support the price of cheese at the price floor, the
USDA had to buy up 1.5 billion pounds of cheese. The accompanying diagram shows supply and
demand curves illustrating the market for cheese.
a. In the absence of a price floor, the maximum price that a few of the consumers are willing to
pay is $0.20 for a pound of cheese whereas the market equilibrium price is $0.13 per pound.
The graph also shows that the minimum price at which a few of the producers are willing to sell
is $0.06 per pound. In the absence of a price floor, how much consumer surplus is created?
b. How much producer surplus?
c. What is the total surplus
Unit 4
[Microeconomics]
d. The maximum price that a few of the consumers are willing to pay is $0.20 per pound of
cheese, and the price floor is set at $0.17 per pound. With the price floor at $0.17 per pound
of cheese, consumers buy 211 billion pounds of cheese. How much consumer surplus is
created now?
e. The minimum price at which a few of the producers are willing to sell a pound of cheese is
$0.06, and the price floor is set at $0.17 per pound. With the price floor at $0.17 per pound of
cheese, producers sell 212.5 billion pounds of cheese (some to consumers and some to the
USDA). How much producer surplus is created now?
f. The surplus cheese USDA buys is the difference between the quantity of cheese producers
sell (212.5 billions of pounds of cheese) and the quantity of cheese consumers are willing to
buy at the price floor (211 billions of pounds of cheese). How much money does the USDA
spend on buying up surplus cheese?
g. Taxes must be collected to pay for the purchases of surplus cheese by the USDA. As a result,
total surplus (producer plus consumer) is reduced by the amount the USDA spent on buying
surplus cheese. Using your answers for parts d, e, & f, what is the total surplus when there is a
price floor?
h. How does this compare to the total surplus without a price floor from part c?
Problem 2
The accompanying table shows the price and yearly quantity sold of ice cream cones on Sidfield
Island.
Price of Ice Cream Cones
$1
$2
$3
$4
Quantity of Ice Cream
Cones Demanded
3000
2400
1600
800
Unit 4
[Microeconomics]
a. Using the midpoint method (show your work), calculate the price elasticity of demand when
the price of an ice cream cone rises from $1 to $2.
b. What does this estimate imply about the price elasticity of demand for ice cream cones?
c. Using the midpoint method (show your work), calculate the price elasticity of demand when
the price of an ice cream cone rises from $3 to $4.
d. What does this estimate imply about the price elasticity of demand for ice cream cones?
e. Notice that the estimates from (a) and (c) above are different. Why do price elasticity of
demand estimates change along the demand curve?
--------------------References:
Unit 4
[Microeconomics]
Microeconomics: Unit 4 Assignment: CS and PS; Elasticity
Content (13 points)
Problem 1:
 Computed consumer surplus for Problem 1a
 Computed producer surplus for Problem 1b
 Computed Total Surplus for Problem 1c.
 Computed consumer surplus for Problem 1d
 Computed producer surplus for Problem 1e
 Computed how much the USDA spends buying up surplus cheese for
Problem 1f
Using answers for 1b through 1d, compute the total surplus when there is a price
floor for Problem 1g.
Discussed how this compares to total surplus without a price floor.
Problem 2:
 Calculated the price elasticity of demand when the price of an ice cream
cone rises from $1 to $2.
 Discussed what the estimate implies about the price elasticity of demand for
ice cream cones.
 Calculated the price elasticity of demand when the price of an ice cream
cone rises from $3 to $4.
 Discussed what this estimate implies about the price elasticity of demand for
ice cream cones.
 Discussed why price elasticity of demand estimates change along the
demand curve for the two examples used.
Analysis (7 points)
Work demonstrates synthesis of concepts, research, and experience
Work demonstrates the student’s ability to tie relevant information to real-life
applications.
Analysis exceeds basic comprehension to demonstrate higher-order thinking.
Writing (5 Points)
Correct use of APA 6th edition format, all sources used to support the paper are
referenced.
Sentences are clear, concise, and direct; tone is appropriate, spelling, grammar, and
punctuation are correct.
Total
Points
Possible
6
1
1
5
3
2
2
2
3
25
Points
Earned