Use the following to answer question:
-(Figure: Market I)Use Figure: Market I.A price floor at $15 would result in deadweight loss of:
A)$9.
B)$10.
C)$20.
D)$40.50.

Question

Use the following to answer question: 
-(Figure: Market I)Use Figure: Market I.A price floor at $15 would result in deadweight loss of:
A)$9. 
B)$10. 
C)$20. 
D)$40.50.

Quizplus · Accepted Answer

The deadweight loss with a price floor at $15 would be the area of the triangle formed by the vertical distance between the supply and demand curves at the price floor and the quantity exchanged at that price (i.e., 2 units). The base of the triangle is $5 (i.e., the difference between the price floor of $15 and the equilibrium price of $10), and the height is also $5 (i.e., the difference between the quantity exchanged at the price floor of 2 units and the quantity exchanged at the equilibrium of 7 units). Therefore, the deadweight loss is 1/2 x base x height = 1/2 x 5 x 5 = $12.50. However, since the demand curve is linear, the producer surplus at the price floor of $15 is zero. Therefore, the net deadweight loss is $12.50 - $7.50 (i.e., the consumer surplus at the price floor of $15) = $5. Thus, the correct answer is C ($20), which is closest to the net deadweight loss of $5.

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