Question

Macroeconomics

Posted 5 months ago

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A price floor of $\$ 44$ has been imposed on this market:
What is the value of the deadweight loss that occurs as a result of sellers who are no longer able to participate in this market?
Choose 1 answer:
(A) $\$ 48$
(B) $\$ 13.50$
(c) $\$ 27$
(D) $\$ 120$
(E) $\$ 22.50$
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Answer from Sia

Posted 5 months ago

Solution

a

Definition of Deadweight Loss: Deadweight loss refers to the loss of economic efficiency that can occur when the equilibrium for a good or a service is not achieved or is not achievable. In the context of a price floor, it represents the loss of transactions that would have occurred in a free market but do not occur due to the price floor being above the equilibrium price

b

Calculation of Deadweight Loss: To calculate the deadweight loss, we need to find the area of the triangle formed by the supply and demand curves and the price floor line. The base of the triangle is the difference between the quantity demanded and the quantity supplied at the price floor. The height is the difference between the price floor and the equilibrium price. The formula for the area of a triangle is $\frac{1}{2} \times \text{base} \times \text{height}$

c

Applying the Formula: The equilibrium quantity is 8 and the equilibrium price is $38. The price floor is set at$44, which intersects the supply curve at a quantity less than 8 (since the supply curve is upward sloping from left to right). The exact quantity supplied at the price floor is not given, but we can infer that it is less than the equilibrium quantity of 8. The base of the triangle is the difference in quantity (8 - quantity supplied at the price floor), and the height is the difference in price ($44 -$38 = $6). Without the exact quantity supplied at the price floor, we cannot calculate the deadweight loss precisely. However, we can match the area of the triangle to the closest answer choice

Answer

The value of the deadweight loss cannot be determined precisely with the given information.

Key Concept

Deadweight loss due to a price floor is the economic efficiency loss when the price is set above the equilibrium.

Explanation

Without the exact quantity supplied at the price floor, we cannot calculate the exact deadweight loss, but we know it is the area of the triangle formed by the supply and demand curves and the price floor line.

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