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1)How can a price floor reduce the total surplus? Show it graphically.

1)How can a price floor reduce the total surplus? Show it graphically.

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Answer #1

Price floor is imposed above the equilibrium price. In the above diagram, equilibrium price is P*, price floor is Pf.

Before Price floor:

  • Consumer surplus is area of portion B + C + E
  • Producer surplus is area of portion D + F
  • Total surplus is area of portion B + C + E + D + F

After Price Floor:

  • Consumer surplus is area of portion B
  • Producer surplus is area of portion C + D
  • Deadweight loss is area of portion E + F
  • Total surplus is area of portion B + C + D

Thus, there is fall in total surplus equal to area deadweight loss which is area of portion E + F.

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