Question

Suppose that supply and demand are given by the following equations: Q_D = 40 – 4P and Q_S = 2p – 2.

In the above market, if a price floor of $8.50 was put into place, which of the following would result?

            A) A shortage of 10 units

            B) A surplus of 11 units
            C) Deadweight loss of at least $24

            D) An increase in consumer surplus.

Why is the Answer C?

Answer 1

At the price floor of 8.50 the demand will be 40 -4 (8.5) = 6 and the supply will be 2(8.5) - 2 = 15. as the supply is more than the demand by 9 option A and B are wrong as the market has a surplus of 9 units.

with a price floor the price in the market increase that will reduce the consumer surplus so option D is also wrong.

Answer is "C".