ECF1100 Lecture Notes - Lecture 4: Deadweight Loss, Price Floor, Economic Surplus

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18 Jul 2018

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Week 4 - supply, demand and government policies, market efficiency and costs of taxation. Equilibrium in a competitive market results in the economically efficient level of output where mb = mc. Economic surplus: the sum of consumer surplus and producer surplus. Deadweight loss: the reduction in economic surplus resulting from a market not being in competitive equilibrium. A legally determined minimum price that sellers may receive. Without the price floor, the equilibrium is (p, q). With the price floor at pmin, there is excess supply of qs - qd. As a result, producer surplus changes from cdf to cd, consumer surplus changes from abe to b, thus the deadweight loss of the price floor is ef. A legally determined maximum price that sellers may receive. Example of price ceiling (rent control short run and long run) Before tax, the equilibrium price is p* and quantity is q*. The price consumers pay is equal to the price producers receive.

Related Questions

The market demand function for corn is Q^d = 20 - 2P

The market supply function is Q^s = 5P - 1

both measured in billions of bushels per year. The initial equilibrium price is $3.00, and the initial equilibrium quantity is 14 billion bushels. Consumer surplus is $49.00, producer surplus is $19.60, and aggregate surplus is $68.60. Suppose the government wants to raise the price of corn to $3.50. What are the welfare effects of a price floor, price support, production quota, and voluntary production reduction program?

Instructions: Round quantities to 1 decimal place and prices to 2 decimal places. State the cost to government in absolute value. Fill in the blank for each of the Program below.

Program 1: A price floor

	Amount ($)
Consumer surplus	_____ billion
Producer surplus	_____ billion
Cost to the government	_____ billion
Aggregate surplus	_____ billion
Deadweight loss	_____ billion

Program 2: A price support

	Amount ($)
Consumer surplus	_____ billion
Producer surplus	_____ billion
Cost to the government	_____ billion
Aggregate surplus	_____ billion
Deadweight loss	_____ billion

Program 3: A production quota

	Amount ($)
Consumer surplus	_____ billion
Producer surplus	_____ billion
Cost to the government	_____ billion
Aggregate surplus	_____ billion
Deadweight loss	_____ billion

Program 4: A voluntary production reduction program

	Amount ($)
Consumer surplus	_____ billion
Producer surplus	_____ billion
Cost to the government	_____ billion
Aggregate surplus	_____ billion
Deadweight loss	_____ billion

The market demand function for corn is Q^d = 20 - 2P

The market supply function is Q^s = 5P - 1

Program 1: A price floor

	Amount ($)
Consumer surplus	_____ billion
Producer surplus	_____ billion
Cost to the government	_____ billion
Aggregate surplus	_____ billion
Deadweight loss	_____ billion

Program 2: A price support

	Amount ($)
Consumer surplus	_____ billion
Producer surplus	_____ billion
Cost to the government	_____ billion
Aggregate surplus	_____ billion
Deadweight loss	_____ billion

Program 3: A production quota

	Amount ($)
Consumer surplus	_____ billion
Producer surplus	_____ billion
Cost to the government	_____ billion
Aggregate surplus	_____ billion
Deadweight loss	_____ billion

Program 4: A voluntary production reduction program

	Amount ($)
Consumer surplus	_____ billion
Producer surplus	_____ billion
Cost to the government	_____ billion
Aggregate surplus	_____ billion
Deadweight loss	_____ billion

The wheat market is perfectly competitive, and the market supply and demand curves are given by the following equations:

QD=20,000,000-4,000,000P

QS=7,000,000+2,500,000P, where QD and QS are quantity demanded and quantity supplied measured in bushels, and P=price per bushel.

a.) Determine consumer surplus at the equilibrium price and quantity.

b.) Assume that the government has imposed a price floor at $2.25 per bushel and agrees to buy any resulting excess supply. How many bushels of wheat will the government be forced to buy? Determine consumer surplus with the price floor.

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ECF1100 Lecture Notes - Lecture 4: Deadweight Loss, Price Floor, Economic Surplus

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