Price Floor

The Price Floor is the minimum price chosen by the government.

Example

The government sets a price floor to $10.

The inverse demand is `P = 14 - Q_D` and the inverse supply is `P = 2 + Q_S`.

After the price floor, there are 4 millions bananas sold at $10.

Consumer surplus is `CS = \frac{\left( 14 - 10 \right) \times 4}{2} = 6`.

Producer surplus is `PS = \left( 10 - 6 \right) \times 4 + \frac{\left( 6 - 2 \right) \times 4}{2} = 16 + 8 = 24`.

Total Surplus is equal to `TS = CS + PS = 6 + 24 = 30`.

The Dead weight loss is equal to `DWL = \frac{\left( 10 - 6 \right) \times \left( 6 - 4 \right)}{2} = 4`.

Question

The inverse demand for bananas is P = 133 - 5Q_D. The inverse supply P = 49 + 9Q_S.

The government sets a $118 price floor.

What is the market quantity? Calculate the Consumer Surplus, the Producer surplus, Total Surplus, and the Dead Weight Loss.

Plug `P = 118` into the inverse demand function $$ \begin{align*} P &= 133 - 5 Q \\ Q &= \frac{ 133 - P }{ 5 } \\ Q &= \frac{ 133 - 118 }{ 5 } \\ Q &= 3.0 \end{align*} $$

$$ \begin{align*} CS &= \frac{ \left( 133 - 118 \right) \times 3 }{ 2 } \\ &= \frac{ 15 \times 3 }{ 2 } \\ &= \frac{ 45 }{ 2 } \\ &= 22.5 \\ \end{align*} $$

$$ \begin{align*} PS &= \left( 118 - 76 \right) \times 3 + \frac{ \left( 76 - 49 \right) \times 3 }{ 2 } \\ &= 42 \times 3 + \frac{ 27 \times 3 }{ 2 } \\ &= 126 + \frac{ 81 }{ 2 } \\ &= 166.5 \\ \end{align*} $$

$$ \begin{align*} TS &= CS + PS \\ &= 22.5 + 166.5 \\ &= 189.0 \\ \end{align*} $$

$$ \begin{align*} DWL &= \frac{ \left( 118 - 76 \right) \times \left( 6.0 - 3 \right) }{ 2 } \\ &= \frac{ 42 \times 3.0 }{ 2 } \\ &= 63.0 \\ \end{align*} $$
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