Question

The ukelele market is in competitive equilibrium when a law introducing an 8 dollar subsidy on ukeleles
is passed. This increases the quantity bought and sold from 33 to 39 and lowers the price by 4 dollars.
Assuming linear demand and supply, what is the deadweight loss of this policy?
(a) 54
(b) 48
(c) 24
(d) 64

answer: C, 24

Could you please show the steps and also explain the definition of DWL?

Answer 1

Refer the picture below to understand the impact of subsidy

deadweight loss Pd pa Difference is the subsidy Q*Osubsidy Quantity

Here, Q* = 33 units

Q _subsidy = 39 units

The difference between the price paid by buyer and price received by supplier that is

$\large P_D - P_S = \$ 8$

The triangle in blue represents the Dead weight loss. Find out the area of the triangle.

$\large DWL = \frac{1}{2}{(Q_S -Q^*)}{(P_D - P_S )}$

$\large DWL = \frac{1}{2}{(39- 33)}*8$

$\large DWL = \frac{1}{2}*6*8$

$\large DWL = \frac{48}{2}$

$\large DWL = \$ 24$

Answer is C.

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