Question
Are these answers correct? If not, which ones need to be re-done?? (Description: The diagram shows a graph with the Quantity along the horizontal axis
Are these answers correct? If not, which ones need to be re-done??
(Description: The diagram shows a graph with the Quantity along the horizontal axis and Price along the vertical axis. A blue downward sloping line, labeled "D" represents the Demand curve for the data in the accompanying chart. A red upward sloping line, labeled "S" represents the Supply curve for the data in the accompanying chart. The point where the two lines cross is labeled "E" and represents the Equilibrium Quantity and Price. A gray dotted line extends downward from the point labeled "E" to the horizontal axis and points to the quantity of 500. Another gray dotted line extends from the point labeled "E" and extends to the right to the vertical axis and points at the price of $50. A black line crosses the graph to the horizontal axis at a price of $70 and is labeled "Price Floor." A red dashed line extends from the point where the black line crosses the red Supply curve and extends down to the horizontal axis and points to the quantity 700. A blue dashed line extends from the point where the black line crosses the blue demand curve and extends down to the horizontal axis, pointing to the quantity of 300.)
a. In the absence of a price floor, the maximum price that a few of the consumers are willing to pay is up to $100 per barrel of gosum berries. The market equilibrium (E) price is $50 per barrel. How muchconsumer surplusis created when there isno price floor?Show your calculations.
Consumer surplus is the amount a consumer is willing to pay minus the market equilibrium price.The consumer surplus when there is no price floor is:0.5*(100-50)*500 = $12,500 (area of triangle ECD).
b. How muchproducer surplusis created when there isno price floor?Show your calculations.
The Producer surplus when there is no price floor is: 0.5(50-0)*500=$12,500 (area of triangle ECS).
c. What is thetotal surpluswhen there isno price floor?Show your calculations.
Before thepricefloor
Total surplus= Consumer surplus + producer surplus
Equilibriumpriceis $50 and equilibrium quantity is 500
Consumer surplus = 1/2(100-50)*500
=$12,500
Producer surplus=1/2(50-0)*500
=$12,500
Total Surplus =$12,500+$12,500 =$25,000
d. After the price floor is instituted, the legal minimum price that can be charged by suppliers is $70 per barrel. The maximum price that a few of the consumers are still willing to pay is $100 per barrel of gosum berries. With the price floor at $70 per barrel, consumers buy 300 barrels of gosum berries per month. How muchconsumer surplusis created with the price floor?Show your calculations.
After thepricefloor, equilibriumpriceis $70 and quantity demanded is 300 units
Consumer surplus = 1/2(100-70)*300
=$4500
e. After the price floor is instituted,the Chairman of Productions Office buys up any barrels of gosum berries that the producers are not able to sell.With the price floor, the producers sell 300 barrels per month to consumers, but the producers, at this high price floor, produce 700 barrels per month. How muchproducer surplusis createdwith the price floor?Show your calculations.
Producer surplus (PS) = Area between supply curve and marketprice
= (1/2) x $(70 - 0) x 700 = (1/2) x $70 x 700 = $24,500
f. The Chairman of Production's Office buys any barrels of gosum berries that the producers are not able to sell. With the price floor, the producers sell 300 barrels per month to consumers; but the producers, at this high price floor, produce 700 barrels per month.How much money does the chairman of production's office spend on buying up gosum berries?Show your calculations.
Producer surplus created with the price floor=1/2(P+Q)*Height
Producer surplus created with the price floor=1/2($40+$70)*300
Producer surplus created with the price floor=$16,500
g. The Emperor of Gondwanaland must collect taxes from the people to pay for the purchases of surplus gosum berries by the Chairman of Production's Office. As a result, total surplus (producer plus consumer) is reduced by the amount the Chairman of Production's Office spent on buying surplus gosum berries. Using your answers for problems d, e, and f above, what is the total surplus when there is a price floor?Show your calculations.
When there is a price floor, there is a creation of a deadweight loss which decreases the total surplus. The deadweight loss is given by the area of the triangle bounded by the supply curve, the demand curve and the line Q=300.
The deadweight loss=1/2(base*height)
base=$70-$30=$40
height=500-300=200 barrels
The deadweight loss=1/2($40*200)
The deadweight loss=$4000
Total surplus when there is a price floor=The total surplus created when there is no price floor - The deadweight loss.
Total surplus when there is a price floor=$25,000-$4,000
Total surplus when there is a price floor=$21,000
h. How does this compare to thetotal surplus without a price floorfrom question c above? Is it more, or less, and by how much?
The total surplus when there is no price floor=Producer surplus + Consumer surplus.
The total surplus when there is no price floor=$12,500 +$12,500
The total surplus when there is no price floor=$25,000
Total surplus when there is a price floor = The total surplus created when there is no price floor - The deadweight loss.
Total surplus when there is a price floor=$25,000-$4,000
Total surplus when there is a price floor=$21,000
The total surplus created by the price floor is $21,000 which is less than the total surplus without a price floor which is $25,000.The total surplus created by the price floor is less than the total surplus without a price floor by ($25,000-$21,000)=$4,000 which is the deadweight loss to society.
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