Question

Consider the market for wheat where demand is given by: Qd 80 2p and supply is given by: QS 502p Now suppose that, due to a market failure (an artificial shipping constraint), a maximum of 60.00 units of wheat can be supplied by firms in the market The amount of the deadweight loss caused by the market failure is $. (Enter your answer rounded to the nearest penny and as a positive number.)

Answer 1

Answer

the equilibrium before failures is at

Qd=Qs

80-2P=50+2P

4P=30

P=7.5

Q=80-2*7.5=65

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after failure, the equilibrium quantity is 60 units as the quantity is below the equilibrium

the equilibrium price is found from the demand curve

Q=80-2P

60=80-2P

2P=20

P=$10

and the price producer willing to accept is

60=50+2P

2P=10

P=5

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deadweight loss =0.5*( after failure price - the producer willingness to accept) * change in quantity

=0.5*(10-5)*(65-60)

=12.5

the deadweight loss is $12.50