Question

Use the following to answer questions 7-8: 

The following table represents buyers' values and sellers' costs from a market experiment like the one you did in recitation. The same assumptions apply: each agent may make only one transaction and fractions of a unit may not be traded.

7. Using the data from the market experiment, which of the following is closest to the total surplus generated in this market? 

A) 160 B) 410 C) 530 D) 950 

8. Using the data from the market experiment in the table above, which of the following is closest to the minimum deadweight loss that would arise from a price floor set at $300 

A) 0 B) 30 C) 100 D) 250 g

Answer 1

7) Arranging the Buyer’s value in descending order, we get the values as: 400, 350, 250, 120, 100.

Arranging the seller’s cost in ascending order, we get the costs as: 100, 150. 220, 270, 320.

Market surplus will be equal to the sum of producer surplus and consumer surplus. When the quantity is less , the market surplus will be the difference between the buyer’s value whose value is the highest and the seller’s cost whose cost is the minimum. This is why we arranged the buyer’s value in descending order and the seller’s cost in ascending order. The market will create surplus as long as the buyer’s value is greater than the seller’s cost. So from the above arrangement of seller’s cost and buyer’s values for goods, we can see that only 3 units will be traded because from the fourth unit onwards, the seller’s cost will be greater than the buyer’s value.

So total market surplus = (400-100)+(350-150)+(250-220) = 300+200+30 = $530.

So option C is the correct answer.

8) Now as the price floor is set at $300, buyers who have a value lesser than $300 will not be able to buy goods. So we can see that now only two goods will be traded because only two of the buyers will have higher value than $300. The market surplus after the price floor of $300 =

(400-100)+(350-150) = 300+200 = $500

Deadweight loss is the loss in the market surplus due to any interference in the market. We can see that the difference in current market surplus from the previous market surplus = $530 - $500 = $30.

So option B is the correct answer.