Question

Suppose that the demand curve for wheat is Qd = 140-20p and the supply curve is 20p. The government imposes a price support at p = $4.00 What is the deadweight loss if the govenment supports the price by purchasing excess supply? (Assume the wheat will be destroyed.) The deadweight loss is s(Round your answer to the nearest penny and enter the deadweight loss as a positive number) Suppose the government is considering supporting the price using a deficiency payment program. What would be the amount of the deficiency payment? The deficiency pay mert would be $ number) and there would be a deadweight loss of $D Round your answer to the nearest penny and enter the dead eght loss as a positive

Answer 1

Market price is determined at

QD = QS

140 - 20P = 20P

P = 140/40 = 3.50

Q = 3.5*20 = 70 units

At the price floor of 4, the quantity demanded is 140 - 20*4 = 60 units and quantity supplied is 20*4 = 80 units. So there is a surplus of 20 units

When government buys these excess supply of 20 units at a price of 4, government's spending is $80. This gives a social loss / deadweight loss = 80 - 0.5*(4 - 3.5)*(80 - 60) = $75.

Deficiency payment will be the amount of money given to the sellers which is in excess of what consumers pay

them. It is equal to (price at price floor - price consumers are willing to pay to buy the floor quantity)*quantity

= (4 - 3)*80 = $80

DWL = 0.5*(4 - 3)*(80 - 70) = $5.