Question

Assume that the market for Good X is defined as follows: QD = 64 - 16P and QS = 16P - 8. If the government imposes a price floor in this market at $3.00, what will consumer surplus be?

Answer 1

Answer

Consumer Surplus is the area below demand curve and above price line.

Price floor will effect market price if price floor is set above equilibrium price.

Equilibrium occurs when Q_D = Q_S => 64 - 16P = 16P - 8 => P = 2.25

Hence Price floor = $3 > Equilibrium price, thus market price will be price equal to price floor.

Thus After price price market price = $3

When Price = 3 , Q_D = 16

When Q_D = 0 then P = 4(Vertical intercept)

Hence Consumer Surplus = (1/2)(4 - 1)*16 = 24.

Hence, Consumer Surplus will be $24.