Question

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

Answer 1

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