Question

# Question 1: For an industry, Qd = 40 – Pd and Qs = Ps.. Suppose the...

Question 1: For an industry, Qd = 40 – Pd and Qs = Ps.. Suppose the government imposes a price floor of \$28. Complete the following table and explain how you derived your answers. No Price Floor Price Floor Consumer Surplus Producer Surplus Total Surplus Deadweight Loss

To determine equilibrium price and quantity, we have to equate

Qd = Qs

40 - P = P

2P = 40

P = 40 / 2 = \$20   [equilibrium price]

Q = 40 - P = 40 - 20 = 20   [equilibrium quantity]

CS = 0.5[(40 - 20) * 20] = \$200

PS = 0.5[(20 - 0) * 20] = \$200

TS = CS + PS = 200 + 200 = \$400

DWL = 0

When government imposes a price floor of \$28

Qd = 40 - P = 40 - 28 = 12

Qs = P = 28

CS = 0.5[(40 - 28) * 12] = \$72

PS = 0.5[(12 - 0) * 12] = \$72

TS = CS + PS = 72 + 72 = \$144

DWL = 0.5[(28 - 12) * (20 - 12)] = \$64

 No Price Floor Price Floor CS \$200 \$72 PS \$200 \$72 TS \$400 \$144 DWL \$0 \$64

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