Applying Canonical Supply-Demand Model in Practice
Use the canonical supply-demand model in the prediction of the supply-demand relationship.
Assume that supply is perfectly elastic and demand is perfectly inelastic. If a price floor is set above the equilibrium price, what will happen to the new equilibrium price and quantity? How do producer surplus and consumer surplus change after this price floor is imposed? Graphically illustrate your answer using the canonical supply-demand model and provide an intuitive explanation.