The government has decided that the free-market price of milk is too low.

a Suppose the government imposes a binding price floor in the milk market. Use a supplyand-demand diagram to show the effect of this policy on the price of milk and the quantity of milk sold. Is there a shortage or surplus of milk?

b Farmers complain that the price floor has reduced their total revenue. Is this possible?

Explain.

c In response to farmers’ complaints, the government agrees to purchase all of the surplus milk at the price floor. Compared with the basic price floor, who benefits from this new policy?

Who loses?