# Draw a supply-and-demand diagram

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

a. Suppose the government imposes a binding price floor in the cheese market.  Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold.  Is there a shortage or surplus of cheese?

b. The farmers complain that the price floor has reduced their total revenue.  Is this possible?  Explain.

c.  In response to farmers’ complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy?  Who loses?

To understand the long-run implications of the Schumpeterian model of creative destruction we made use of the mathematical concept of \Law of Large Numbers”. Please take a look at the (https://en.wikipedia.org/wiki/Law_of_large_numbers) for a quick review. As I showed in class, this concept can be understood using simulations. Please simulate 1000 coin tosses using Excel (hint: create a random variable with 1 being equal to one side of the coin and 0 being equal to the other side, and create a column with 1000 rows/tosses) and show that the expected value converges to 0.5. Provide a plot and the Excel  file with your equations.

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