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

a. Suppose the government imposes a binding price floor in the mustard oil market. Draw a

supply-and demand diagram to show the effect of this policy on the price of mustard oil and

the quantity of mustard oil sold. Is there a shortage or surplus of mustard oil?

b. Producers of mustard oil complain that the price floor has reduced their total revenue. Is this

possible? Explain.

c. In response to mustard oil producers' complaints, the government agrees to purchase all the

surplus mustard oil at the price floor. Compared to the basic price floor, who benefits from this

new policy? Who loses?