HW5_Answerkey - Homework 5 Answer Key 1 Consider the market...

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Homework # 5 – Answer Key 1) Consider the market for American flags. The price is measured in dollars per flag and the quantity is measured in number of flags per day. In any given day, the demand curve for American flags is D = 25-0.5P and the supply curve is S = 0.25P - 5, where D is the quantity demanded and S is the quantity supplied. a) Compute the size of the consumer surplus, producer surplus, and deadweight loss. a) CS = $25; PS = $200; DWL = $0 b) CS = $25; PS = $50; DWL = $0 c) CS = $50; PS = $100; DWL = $200 d) CS = $50; PS = $25; DWL = $100 Answer: b) Inverse demand: P=50 - 2D Inverse supply: P=20 + 4S Equilibrium: 50 – 2Q = 20 + 4Q barb4right 6Q = 30 barb4right Q = 5 P = 50 – 2 x 5 barb4right P = 40 CS: Grey area; PS: Green area CS = (50-40) x 5 / 2 = $25 PS = (40-20) x 5 / 2 = $50 DWL = $0
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b) Consider the American flags market described in the question above. Now suppose that, for patriotic reasons, the U.S. government imposes a price floor at $45/flag. Compute the new consumer surplus, producer surplus, and deadweight loss, assuming that there are no wasted resources associated with illegal or search type activities.
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