Question

Given, QD = 5 - P

QS = 0.5P

A. Market equilibrium will be at that point where Quantity Demanded is Equal to Quantity Supplied

5 - P = 0.5P

1.5P = 5

Equilibrium price, P* = \$ 3.33 per unit

Equilibrium Quantity, Q* = 1.67 units

B. Consumer Surplus, CS = (1/2)*(5 - 3.33)*1.67 = \$ 1.39

Producer surplus, PS = (1/2)*(3.33 -0 )*1.67 = \$ 2.78

Total surplus = Consumer Surplus + Producer surplus

Total surplus = \$ 1.39 + 2.78

TS = \$ 4.17

C. When a price floor of \$4 is introduced

Quantity Demanded = 1

Price = 4

When Q = 1,

Price of supply = \$2

Consumer Surplus = (1/2)*(5-4)*1 = \$ 0.5

Producer surplus = (4-2)*1 +(1/2)*(2-0)*1 = \$3

Deadweight loss = (1/2)*(1.67-1)*(4-2) = \$ 0.67

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