The figure depicts the market for milk in Sydney, Montana. Suppose the government imposes a price floor
Question:
The figure depicts the market for milk in Sydney, Montana. Suppose the government imposes a price floor on milk of $1,050 per unit. At this price floor, deadweight loss will be_______ per month.
a. $4,500
b. $27,000
c. $33,750
d. $11,250
e. $9,000
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The correct answer is b 27000 Heres why A price floor is a minimum price set by the government that producers must receive for their goodsIn the graphthe price floor is set at 1050 per unitwhich is above the equilibrium price of 750 per unit At the price floorthe quantity of milk supplied by producers increases to 60 units per monthwhile the quantity demanded by consumers decreases to 20 units per monthThis creates a surplus of 40 units per month 60 units supplied 20 units demanded Deadweight loss is the economic inefficiency that occurs when a market is not in equilibriumIt is the sum of the producer surplus and consumer surplus that is lost due to the government intervention In this casethe deadweight loss triangle is the shaded area between the supply curvethe demand curveand the price floorTo calculate the area of the trianglewe need to know the base and heightThe base is the difference between the equilibrium quantity 40 units and the quantity demanded at the price floor 20 unitswhich is 20 unitsThe height is the difference between the price floor and the equilibrium pricewhich is 300 per unit 1050 750 Thereforethe deadweight loss is12 20 units 300 per unit 3000 per month Since the deadweight loss occurs every monththe total deadweight loss per month is 3000month 9 monthsyear 27000 per year Lets see why the other options are incorrect a 4500 This is the area of the producer surplus triangle at the price floor However it only represents the gain for producers not the deadweight loss to society as a whole c 33750 This is the sum of the producer surplus and consumer surplus at the equilibrium price However it does not take into account the deadweight loss created by the price floor d 11250 This is half of the deadweight loss However the deadweight loss triangle is not symmetrical so half of its area is not equal to the total deadweight loss e 9000 This is not a relevant value in the graph ...View the full answer
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ISBN: 9780470574782
1st Edition
Authors: Wendy A. Stock
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