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15 March, 00:10

Assume that the market for good x is defined as follows: qd = 64 - 16p and qs = 16p - 8. if the government restricts output in this market to 16 units, what is the loss associated with this policy?

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  1. 15 March, 02:07
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    I guess the answer is $9.

    At equilibrium, Qd=Qs

    Therefore, 64-16P=16P-8

    Or, 32P=72 or, P=72/32=$2.25

    At equilibrium, Qd=Qs=28.

    If government restricts quantity to 16 units then it will create deadweight loss to the market.

    If quantity=16,

    Qd=16=64-16P or, Pdemand = 3

    Demand price is $3 at this fixed quantity=16 Similarly, Qs=16=16P-8 or, Psupply = $1.5

    At this quantity, supply price is $1.5

    So, deadweight loss = loss in consumer surplus + loss in producers surplus

    ={ (1/2) * (28-16) * (3-2.25) } + { (1/2) * (28-16) * (2.25-1.5) }

    = (4.5+4.5) = 9

    Therefore, loss equals $9.
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