The U.S. Department of Agriculture (USDA) administers the price floor for butter, which the 2008 Farm Bill set at 1.05$perpound.Atthatprice,accordingtodatafromtheUSDA,thequantityofbuttersuppliedin2010was$1.7$billionpounds,andthequantitydemandedwas$1.6$billionpounds.Tosupportthepriceofbutteratthepricefloor,theUSDAthereforehadtobuyup100millionpoundsofbutter.Theaccompanyingdiagramshowssupplyanddemandcurvesillustratingthemarketforbutter.a.Intheabsenceofapricefloor,howmuchconsumersurplusiscreated?Howmuchproducersurplus?Whatisthetotalsurplus?b.Withthepricefloorat$\$1.05$ per pound of butter, consumers buy $1.6$ billion pounds of butter. How much consumer surplus is created now?c. With the price floor at \\ 1.05$perpoundofbutter,producerssell$1.7$billionpoundsofbutter(sometoconsumersandsometotheUSDA).Howmuchproducersurplusiscreatednow?d.HowmuchmoneydoestheUSDAspendonbuyingupsurplusbutter?e.TaxesmustbecollectedtopayforthepurchasesofsurplusbutterbytheUSDA.Asaresult,totalsurplus(producerplusconsumer)isreducedbytheamounttheUSDAspentonbuyingsurplusbutter.Usingyouranswersforparts$\mathrm{b}-\mathrm{d}$, what is the total surplus when there is a price floor? How does this compare to the total surplus without a price floor from part a?

Key Concepts: Price Floor, Quantity Supplied, Quantity Demanded, Consumer Surplus, Producer Surplus, Total Surplus Explanation: The question is asking us to determine consumer surplus, producer surplus, and total surplus with and without a price floor. We are also asked to calculate the amount of surplus butter and the amount spent by USDA to buy it, as well as determine the effect of this on total surplus. Step by Step Solution: Step 1. Without a price floor, consumer surplus is the area above the supply curve and below the demand curve up to the point where quantity demanded equals quantity supplied. The equilibrium price is the price at that point. Producer surplus is the area below the demand curve and above the supply curve up to the equilibrium price. Total surplus is the sum of consumer surplus and producer surplus. Step 2. Using the data given, we see that at the equilibrium price, the quantity demanded is $1.6$ billion pounds and the quantity supplied is $1.7$ billion pounds. If we assume a linear supply and demand curve, then the equilibrium price can be calculated as follows: Equilibrium price = intercept of demand curve - slope * intercept of supply curve = 1.6 + (0.1) \times 1.6 = \1.76$.Thetotalsurpluswithoutapriceflooristhenequaltotheareaofthetriangleformedbytheverticalaxis,thesupplycurve,andthedemandcurveuptotheequilibriumquantity.Usingtheformulafortheareaofatriangle,totalsurplus=0.5\ast (1.7-1.6)\ast (1.76-0)=$0.088$billiondollars.Step3.Withapricefloorof1.05,$ the quantity demanded is $1.6$ billion pounds, while the quantity supplied is $1.7$ billion pounds. The price floor does not allow the market to clear, leading to a surplus of $0.1$ billion pounds of butter, which is bought up by the USDA. The area above the price floor and below the demand curve up to the quantity of $1.6$ billion pounds is consumer surplus. Consumer surplus = 0.5 * (1.7 - 1.6) * (1.76 - 1.05) = $0.058$ billion dollars. Step 4. The area above the supply curve and below the price floor up to the quantity of $1.7$ billion pounds is producer surplus. Producer surplus = 0.5 * (1.7 - 1.6) * (1.05 - 0) = $0.053$ billion dollars. Step 5. The USDA spends $1.05\ast 0.1=$0.105 billion dollars on buying up the surplus butter. Step 6. Total surplus with a price floor is equal to consumer surplus plus producer surplus after deducting the amount spent by the USDA to buy up surplus butter. Total surplus = Consumer surplus + Producer surplus - Amount spent by USDA = 0.058 + 0.053 - 0.105 = \0.006$ billion dollars. This is significantly lower than the total surplus without a price floor. Final Answer: Total surplus with a price floor is $0.006$ billion dollars. Without a price floor, total surplus is $0.088$ billion dollars.