Question

Consider a market where supply and demand are given by QXS = -14 + PX and QXd = 91 - 2PX. Suppose the government imposes a price floor of $42, and agrees to purchase and discard any and all units consumers do not buy at the floor price of $42 per unit. Instructions: Enter your responses rounded to the nearest penny (two decimal places).

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

b. Compute the lost social welfare (deadweight loss) that stems from the $42 price floor.

I need the answer ASAP Please?

Answer 1

Under the market where supply and demand, QXS = -14 + PX and QXd = 91 - 2PX, the market quantity and price are

-14 + PX = 91 - 2PX

105 = 3PX

PX = 35 and QX = 61

At price floor of $42, QXS = -14 + 42 = 28 units and QXd = 91 - 2*42 = 7 units. There is a surplus of 28 - 7 = 21 units.  

a. Cost to the government of buying firms’ unsold units equivalent to 21 units = 21 x 42 = 882

b. Lost social welfare (deadweight loss) = Government's expense - upper triangle for surplus = 882 - 0.5*(surplus)*(price floor - market price) = 882 - 0.5*(42 - 35)*21 = 808.50