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Advanced Analysis of Consumer Surplus and Deadweight Loss

Assume the following values for the figures attached.
Q1 = 20 bags
Q2 = 15 bags
Q3 = 27 bags.
The market equilibrium price is $45 per bag.
The price at a is $85 per bag.
The price at c is $5 per bag.
The price at f is $59 per bag.
The price at g is $31 per bag.
Apply the formula for the area of a triangle (Area = Base Height) to answer the following questions.

a.What is the dollar value of the total surplus (producer surplus plus consumer surplus) when the allocatively efficient output level is being produced? How large is the dollar value of the consumer surplus at that output level?

b.What is the dollar value of the deadweight loss when output level Q2 is being produced? What is the total surplus when output level Q2 is being produced?

c.What is the dollar value of the deadweight loss when output level Q3 is produced? What is the dollar value of the total surplus when output level Q3 is produced?

Reference:
(Campbell, McConnell. Economics, 19th Edition. McGraw-Hill Learning Solutions, 01/2011. p. 113).

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Solution Preview

a)
The demand and supply functions are:
P = 85-2Qd
P = 5+2Qs
85-2Qd = 5+2Qs
At the allocatively efficient quantity, Qd = Qs.
85-2Q = 5+2Q
80 = 4Q
Q = 20
P = 85-2Q
P = 85-40
P = 45

Therefore the ...

Solution Summary

Given data on the market demand and supply at various price levels, this solution shows how to calculate the producer surplus, consumer surplus and dead-weight loss at various levels of output.

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