Policy impact of price floor

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Suppose in organic honey market, demand and supply for organic honey are given as below. The unit of Q as million bottles.

-Demand function: Qd = 25 - 5 * P

-Supply function: Qs = 4 + 2 * P Here P is the price of organic honey ($/bottle). To improve the revenue of honey producers (bee farmers), the government (USDA) is trying to set up a price floor. Now USDA imposes one price floor (a minimum market price) at $4/bottle.

(1) Use your language to explain what is a price floor? What are possible economic impacts of using a price floor?

(2) What the policy impact of this price floor? Does the price floor work? How to explain the impact of this price floor?

Reference no: EM133083282

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