3. Discuss the efficiency and welfare implications of this policy. Is the government intervention justifiable? Show the needed calculations to justify your answer. [3 Marks]

Question 1: Consider the market for wheat, whose demand and supply curves are illustrated in the diagram below. Figure 1: Demand and Supply for Wheat $ 10 S D 9 8 7 6 5 4 3 2 1 10 20 30 40 50 60 70 A. At an equilibrium price of $6 and equilibrium quantity of 30 bushels of wheat, calculate the consumer surplus, producer surplus and total surplus in the market. Show ALL of your work to justify your answer. [1 Mark] [Hint: The area of a triangle = 1 x height x base; The area of a rectangle = height x base] 2 B. Suppose the government introduces a price floor of $8 per bushel of wheat to ensure that farmers get a fair price for their produce. What will be the quantity of wheat demanded and supplied in the market after introducing this price floor? Will this policy result in a shortage or surplus of wheat? [1 Marks]