 Business
29 January, 04:21

# 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 be the total loss in welfare to the economy?

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Answers (1)
1. 29 January, 04:55
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The total loss in welfare to the economy will be - \$32.

Explanation:

By intersecting the supply function QS to the demand function QD, we will find the equilibrium price:

QD = QS

16P - 8 = 64 - 16P

16P + 16P = 64 + 8 =

32P = 72

P = \$2.00

Replacing the equilibrium price either in QS or QD, we foind the equilibrium quantity:

QS = 64 - 16*2 = 64 - 32

QS = 32

In this case the total revenues at the equilibrium price RE will be:

RE = 32 * \$2 = \$64

On the other hand if the government imposes a price floor at \$3.00, then the new total revenues RN will be:

RN = 32 * \$3 = \$96

Therefore the total losses is find by subtracting the revenue at the goverment price floor RN to the revenue at the equilibrium price RE:

LT = RE - RN

LT = \$64 - \$96 = - \$32
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