Question

1. For this assignment you will need to first build a graph to these specifications: Draw a downward sloping demand curve with vertical intercept (0,150) and horizontal intercept (25,0). Draw a supply curve with vertical intercept (0,50) and with slope=4 i.e. the market equilibrium occurs at (10, 90).

a. Compute consumer, producer, and total surplus at the market equilibrium.

b. Label consumer surplus and producer surplus if the government imposes a price floor of $120, then compute deadweight loss.

c. Compute deadweight loss when the government imposes a price floor of $70.

2.) Good weather in Florida creates a bumper crop of oranges. As a result of the good weather, what happens to the consumer surplus in the market for oranges and to the consumer surplus in the market for orange juice? Draw the necessary graphs to represent this scenario and then write a sentence or two with your answer.

Answer 1

1) a) consumer surplus = 0.5* (150-90) (10)= 300

Producer surplus =0.5(90-60)10= 150

Total surplus = consumer surplus + producer surplus = 300+ 150= 450

b) Quantity demanded with price floor= (150- 120)/6 = 5

Consumer surplus = 0.5(150-120)5 = 75

Producer surplus = (120-70)5 + 0.5(70-50)5 = 250+ 50= 300

Deadweight loss= 0.5(120-70)(10-5) = 125

C) price floor below the equilibrium market price is non binding.