Question

1. Consider a market where supply and demand are given by QXS = -16 + PX and QXd = 92 - 2PX. Suppose the government imposes a price floor of $40, and agrees to purchase and discard any and all units consumers do not buy at the floor price of $40 per unit. a. Determine the cost to the government of buying firms' unsold units. I know the answer for this $480 b. Compute the lost social welfare (deadweight loss) that stems from the $40 price floor. *****Please note I submitted this question before and the answer for part b was incorrect. The deadweight is not $48, $72, or $16.

Answer 1

Market has QXS = -16 + PX and QXd = 92 - 2PX.

There is a price floor of $40, and government agrees to purchase all units consumers do not buy at the floor price of $40 per unit.

a. Determine the cost to the government of buying firms' unsold units.

Quantity demanded = 92 - 2*40 = 12 units Quantity supplied = -16 + 40 = 24.

Unsold units = 24 - 12 = 12

Price = $40

Cost to the government = 40*12 = $480.

b. Compute the lost social welfare (deadweight loss) that stems from the $40 price floor

DWL loss = (Area showing wastage of resources) = C + E = F = (Cost to the government - D) = 480 - 0.5*(Qs - Qd)*(Price floor - equilibrium price)

= 480 - 0.5*(24 - 12)*(40- 36) = $456