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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 market. Draw a supply and demand diagram to show the effect of this policy on the price of milk and the quantity of milk sold. [4 points]
b) Farmers complain that the price floor has made them worse off. Is this possible? Explain. [4 points]
c) In response to farmers’ complaints, the government agrees to purchase all the surplus milk at the price floor. Who benefits from this new policy? Who loses?
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