Answer to Question #172765 in Microeconomics for Deepti aggarwal

Question

Market demand function is given by Qd = 180 – 2P

Market supply function is given by Qs = ‐ 15 + P

Determine producer surplus, consumer surplus and total economic surplus at the equilibrium price. Calculate the DWL that would result from a price floor imposed at a level of 72. 

Answer 1

Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay for a good or service.

On the other hand, producer surplus is the difference between the actual price of a good or service–the market price–and the lowest price a producer would be willing to accept for a good.

Consumer surplus

At equilibrium; quantity demanded equal the quantity supplied

$Qd=180-2P$

$Qs=-15+P$

$180-2P=-15+P$

$180+15=P+2P$

$P=65$

$Qd=180-2(65)$

$Qd=50$

At price 0 the quantity demanded is 180 and at quantity 0 units the Price is 90

At 0 units of quantity supplied the price is 15

Consumer Surplus (CS) = 1/2*b*h

Consumer surplus (CS) =$1/2*50*(90-65)$

$CS=1/2*50*25$

$CS=625$

Producer Surplus (PS) = $1/2*b*h$

$PS=1/2*50*50$

$PS =1,250$

Total Economic Surplus (TEC) = Consumer Surplus + Producer Surplus

$TEC=625+1,250$

$TEC=1,875$

Deadweight Loss (DWL) as result of price floor imposed at 72

$Qd=180-2(72)$

$Qd =36$ implying that as price increases the quantity demanded decreases.

At $Qd=36$ Then the price for the supply will reduce to 51

$36=-15+P$

$P=51$

Dead Weight Loss (DWL) = 1/2* Price difference*Quantity Difference

$DWL=1/2*(P2-P1)*(Qe-Q2)$

$DWL=1/2*(72-51)*(50-36)$

$DWL=1/2*21*14$

$DWL=147$