The government has decided that the free-market price of cheese is too low. Suppose the government imposes a binding price floor...

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)