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 = 51 - 13Q_D. The inverse supply P = 21 + 2Q_S.

The government sets a \$38 price floor.

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

Plug P = 38 into the inverse demand function \begin{align*} P &= 51 - 13 Q \\ Q &= \frac{ 51 - P }{ 13 } \\ Q &= \frac{ 51 - 38 }{ 13 } \\ Q &= 1.0 \end{align*}
\begin{align*} CS &= \frac{ \left( 51 - 38 \right) \times 1 }{ 2 } \\ &= \frac{ 13 \times 1 }{ 2 } \\ &= \frac{ 13 }{ 2 } \\ &= 6.5 \\ \end{align*}
\begin{align*} PS &= \left( 38 - 23 \right) \times 1 + \frac{ \left( 23 - 21 \right) \times 1 }{ 2 } \\ &= 15 \times 1 + \frac{ 2 \times 1 }{ 2 } \\ &= 15 + \frac{ 2 }{ 2 } \\ &= 16.0 \\ \end{align*}
\begin{align*} TS &= CS + PS \\ &= 6.5 + 16.0 \\ &= 22.5 \\ \end{align*}
\begin{align*} DWL &= \frac{ \left( 38 - 23 \right) \times \left( 2.0 - 1 \right) }{ 2 } \\ &= \frac{ 15 \times 1.0 }{ 2 } \\ &= 7.5 \\ \end{align*}