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Market for Refurbished Washing Machines-1

Market for Refurbished Washing Machines-1 - Market for...

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Market for Refurbished Washing Machines Each person demands a washing machine at the price next to their name. Jose $700 Richard $600 Amy $500 Anthony $400 Nathan $300 Darrell $200 Geoffrey $100 Each person is willing to supply a washing machine at the price next to their name. Susan $100 Betty $200 Cathy $300 Darva $400 Emily $500 Francis $600 Germaine $700 The market equilibrium is shown in the following figure. $100 $700 3 $400 Q P
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At the equilibrium: x Consumer Surplus (CS) is $600 o Jose’s CS is $300 o Richards CS is $200 o Amy’s CS is $100 x Producer Surplus (PS) is $600 o Susan’s PS is $300 o Betty’s PS is $200 o Cathy’s PS is $100 x Total Welfare (TW)=CS+PS=$1,200
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Example 1: Consider a price ceiling of $200. At this price producers will only be willing to supply 2 washing machines, but consumers will demand 5. $200 $100 $700 3 5 2 $400 Q P Assuming that only the consumers with the highest valuations get to buy refurbished wash machines. x CS is $900 o Jose’s CS is $500 o Richards CS is $400 x PS is $100 (All of the PS is Susan’s) x TW is $1000 Comparing the TW at the equilibrium and at the price ceiling we see that the deadweight loss resulting form the price ceiling is $200. This deadweight loss results from the fact the quantity is too low under the price ceiling.
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