Figure 9.3.1
-Refer to Figure 9.3.1. If the government establishes a price floor of $40 and government purchases the surplus over quantity demanded, the resulting deadweight loss will be:

Question

Quizplus · Accepted Answer

The deadweight loss triangle is equal to the area between the supply and demand curves up to the quantity where the vertical distance between the two curves is equal to the size of the price floor (in this case, $10). This gives us a deadweight loss triangle with a base of 10 widgets and a height from the price floor to the demand curve of $105. The area of this triangle is 1/2 x 10 x $105 = $525. Since the government purchases the surplus over quantity demanded, they would purchase 20-10=10 widgets at a cost of $40 each, for a total cost of $400. This means the deadweight loss plus the cost to the government is $525+$400 = $925. However, since the government would have received revenue of $20 x 20 = $400 if there was no price floor, the total loss to society is $925 - $400 = $525. Therefore, the resulting deadweight loss will be $525 + the cost to the government, which is $525 + $525 = $1,050.

Figure 9.3.1 -Refer to Figure 9.3.1. If the Government Establishes a Price