Microeconomics I, IUPNA

Chapter 7. Competitive Markets: Applications

Problem Set
1. Let us assume that the US gasoline market has the following demand and supply curves

Qd = 10 0.5Pd
Qs = -2 + Ps when Ps 2 and Qs = 0 when Ps < 2,

where quantities represent millions of gallons per year and prices refer to the amount of $
per gallon

a) With no tax, what are the equilibrium price and quantity?

b) Suppose the government imposes an excise tax of $3 per gallon. What will the new
equilibrium quantity be? What price will buyers pay? What price will sellers
receive?
c) Find the impact of this tax on the consumer surplus and the producer surplus. In
addition, calculate the tax collection from the government and the welfare
deadweight loss.
Qd Qs
With a $3 tax, setting

implies
10 .5( P s 3) 2 P s
Ps 7

Pd

P d 10

Substituting into the equation for

implies
. Substituting this price into the equation
Q5
for quantity demanded implies
million. At these prices and quantities, consumer surplus is
$25 million, producer surplus is $12.5 million, and government tax receipts are $15 million. The

Microeconomics I, IUPNA

deadweight loss is $1.5 million. The deadweight loss measures the difference between potential
net benefits ($54 million) and the net benefits that are actually achieved ($25 + $12.5 + $15 =
$52.5 million).
2. Suppose that the market for cigarettes in a particular town has the following supply and
demand curves: QS = P; QD = 50 P, where the quantities are measured in thousands of
units. Suppose that the town council needs to raise $300,000 in revenue and decides to do
this by taxing the cigarette market. What should the excise tax be in order to raise the
required amount of money?
PD PS T

Suppose that the required tax is $T. Then in equilibrium,

. This implies that
50 Q Q T
, or Q = 25 0.5T. Since the required amount is $300,000, we must have T*Q =
600. (Remember that Q is measured in thousands of units). So, T(25 0.5T) = 600. Solving this
equation we get two possible values for the tax: T = $20 or T = $30. Either one would generate
$300,000 in tax revenues, though of course T = $20 would do so with a smaller deadweight loss.
3. In a perfectly competitive market, the market demand curve is given by Qd = 200 5Pd,
and the market supply curve is given by Qd = 35Ps.
a) Find the equilibrium market price and quantity demanded and supplied in the absence
of price controls.
b) Suppose a price ceiling of $2 per unit is imposed. What is the quantity supplied with a
price ceiling of this magnitude? What is the size of the shortage created by the price
ceiling?
c) Find the consumer surplus and producer surplus in the absence of a price ceiling. What
is the net economic benefit in the absence of the price ceiling?
d) Find the consumer surplus and producer surplus under the price ceiling. Assume that
rationing of the scarce good is as efficient as possible. What is the net economic benefit in
this case? Does the price ceiling result in a deadweight loss? If so, how much is it?

c)

a)

Pd = Ps = $5; Qd = Qs = 175 units.

b)

Qs= 70 units.
The surplus implications of a price ceiling are shown below.

Microeconomics I, IUPNA

With No Price Ceiling

With Price Ceiling:

Efficient Rationing

Impact of Price
Ceiling

A+B+C+I

A+B+F

FCI

($3,062.50)

($2,170)

(-$892.50)

G+F+E+H

-F-E-H

($437.50)

($70)

(-$367.50)

Net benefits
(consumer surplus +
producer surplus)

A+B+C+I+G+F+E+H
($3,500)

A+B+F+G

-C-I-E-H

($2,240)

(-$1,260)

Deadweight loss

Zero

C+E+I+H ($1,260)

C+E+I+H ($1,260)

Consumer surplus

Producer surplus

P
40
A

F
2

G
70

120

175

190 200

70

For the questions 4-6, use the following information. The market for gizmos is competitive,
with an upward sloping supply curve and a downward sloping demand curve. With no
government intervention, the equilibrium price would be $25 and the equilibrium quantity
would be 10,000 gizmos. Consider the following programs of government intervention:

Microeconomics I, IUPNA

Program I: The government imposes an excise tax of $2 per gizmo

Program II: The government provides a subsidy of $2 per gizmo for gizmo producers.
Program III: The government imposes a price floor of $30.
Program IV: The government imposes a price ceiling of $20.
Program V: The government allows no more than 8,000 gizmos to be produced.

4. Which of these programs would lead to a less than 10,000 units exchanged in the
market? Briefly explain.

Program I: The excise tax will increase the price consumers pay to a level above $25, and lower
the price producers receive to a level below $25; thus, the quantity exchanged in the market will
fall below 10,000 units.
Program II: With the subsidy, the price producers receive will increase to a level above $25; the
price consumers receive will fall below $25. Thus, the equilibrium quantity exchanged will rise
to a level above 10,000.
Program III. With the price floor of $30, consumers will buy less than 10,000 gizmos, so fewer
than 10,000 will be exchanged in the market.
Program IV. With the price ceiling of $20, producers will supply less than 10,000 gizmos, so
fewer than 10,000 will be exchanged in the market.
Program V. By government fiat, fewer than 10,000 gizmos will be exchanged.

5. Under which of these programs will the market clear? Briefly explain.

With the excise tax or the subsidy, the market will clear (Programs I and II).
With the price floor (Program III) there will be excess supply, so the market will not clear.
With the price ceiling (Program IV) there will be excess demand, so the market will not clear.
With the production quota (Program V) the price consumers pay will exceed $25, so there will be
excess supply. The market will not clear.

Microeconomics I, IUPNA

6. Which of these programs would surely lead to an increase in consumer surplus? Briefly
explain.

With the excise tax (Program I) the price consumers pay will rise, so consumer surplus will
surely fall.
With the subsidy (Program II) the price consumers pay will fall, so consumer surplus will surely
rise.
With the price floor (Program III) the price consumers pay will rise, so consumer surplus will
surely fall.
With the price ceiling (Program III) the price consumers pay will fall, but so will the quantity
produced. Consumer surplus may fall. This can occur if the price floor is so low that very few
units are produced (and thus available for purchase by consumers).
With the production quota (Program V) the price consumers pay will rise, so consumer surplus
will surely fall.

7. Suppose the market for corn in Pulmonia is competitive. No imports and exports are
possible. The demand curve is Qd = 10 Pd, where, Qd is the quantity demanded (in millions
of bushels) when the price consumers pay is Pd. The supply curve is

where Qs is the quantity supplied (in millions of bushels) when the price producers receive
is Ps.
a) What are the equilibrium price and quantity?
b) At the equilibrium in part (a), what is consumer surplus? producer surplus? deadweight
loss? Show all of these graphically.
c) Suppose the government imposes an excise tax of $2 per unit to raise government
revenues. What will the new equilibrium quantity be? What price will buyers pay? What
price will sellers receive?

Microeconomics I, IUPNA

d) At the equilibrium in part (c), what is consumer surplus? producer surplus? the impact
on the government budget (here a positive number, the government tax receipts)?
deadweight loss? Show all of these graphically.
e) Suppose the government has a change of heart about the importance of corn revenues to
the happiness of the Pulmonian farmers. The tax is removed, and a subsidy of $1 per unit is
granted to corn producers. What will the equilibrium quantity be? What price will the
buyer pay? What amount (including the subsidy) will corn farmers receive?
f) At the equilibrium in part (e), what is consumer surplus? producer surplus? What will be
the total cost to the government? deadweight loss? Show all of these graphically.
g) Verify that for your answers to parts (b), (d), and (f) the following sum is always the
same: consumer surplus + producer surplus + budgetary impact + deadweight loss. Why is
the sum equal in all three cases?

Qd Qs
a)

Setting

results in
10 P 4 P
P $7 per bushel

Q3

Substituting this result into the demand equation gives

b)

million bushels.

(10 7)3 4.5

At the equilibrium, consumer surplus is

and producer surplus is
1 (7 4)3 4.5
2
. There is no deadweight loss in this case and total net benefits equal $9 million.

Microeconomics I, IUPNA

Price

15.00
Supply

Demand

10.00

A
B

5.00
0.00
0

10

Quantity (millions of bushels)

In the graph above, area A represents consumer surplus and area B represents producer surplus.

c)

If the government imposes an excise tax of $2, the new equilibrium will be
10 ( P s 2) 4 P s

P $6 per bushel

Pd

Substituting back into the equation for

Q2
equation implies
million.

yields

Pd 8

into the supply

2 (6 4)2 2
Now the consumer surplus is
, the producer surplus is
, the
1 (8 6)(3 2) 1
2(2) 4
2
tax receipts are
, and the deadweight loss is
(all measured in millions
of dollars).
1

d)

(10 8)2 2

, and substituting

Ps

Price

Microeconomics I, IUPNA

14.00
12.00
Demand
10.00
A
8.00
C
6.00
B
4.00
2.00
0.00

Supply + 2

Supply

D E

Quantity (millions of bushels)

In the graph above, area A represents consumer surplus, area B represents producer surplus, areas
C+D represent government tax receipts, and area E represents the deadweight loss.

e)

If the government provides a subsidy of $1, the new equilibrium will be

10 ( P s 1) 4 P s
P s $7.5 per bushel

Substituting back into the equation for

Q 3.5
equation implies
million.

Pd

yields

P d 6.5

, and substituting

Ps

into the supply

2 (10 6.5)3.5 6.125

Now the consumer surplus is
, the producer surplus is
1 (7.5 4)3.5 6.125
1(3.5) 3.5
2
, the subsidy paid is
(negative since the government is
1 (7.5 6.5)(3.5 3) 0.25
2
paying this amount), and the deadweight loss is
(all measured in
millions of dollars).
1

f)

Price

Microeconomics I, IUPNA

Demand

9.50
8.50
7.50
6.50
5.50
4.50
3.50
2.50

Supply

C
A
B
F

Supply - 1
D

0.5

1.5

2.5

3.5

4.5

Quantity (millions of bushels)

In the graph above, areas A+B+E represent consumer surplus, areas B+C+F represent producer
surplus, areas B+C+D+E represent the government subsidy payment, and area D represents the
deadweight loss.

g)

For part (b), the sum of consumer surplus, producer surplus, budgetary impact, and
4.5 4.5 0 0 9
2 2 4 1 9
deadweight loss is
; for part (d), the sum is
; and for part (f) it
is 6.125 + 6.125 3.5 + 0.25 = 9. (As above, all are measured in millions of dollars). These
sums are all the same because the deadweight loss measures the difference between net benefits
(in terms of CS, PS, and budgetary impact) under the competitive outcome and net benefits under
a form of government intervention.
8. In a perfectly competitive market, the market demand and market supply curves are
given by Qd = 1000 10Pd and Qd = 30Ps. Suppose the government provides a subsidy of $20
per unit to all sellers in the market.
a) Find the equilibrium quantity demanded and supplied; find the equilibrium market
price paid by buyers;
find the equilibrium after-subsidy price received by firms.
b) Find the consumer surplus and producer surplus in the absence of the subsidy. What is
the net economic benefit in the absence of a subsidy?
c) Find the consumer surplus and producer surplus in the presence of the subsidy. What is
the impact of the subsidy on the government budget? What is the net economic benefit
under the subsidy program?

Microeconomics I, IUPNA

d) Does the subsidy result in a deadweight loss? If so, how much is it?

In this case, the after-subsidy price received by sellers is Ps = Pd + 20. The market-clearing
condition is: 1000 10P = 30(P + 20), where P denotes the market price. This implies P = 10
and Q = 900. Since sellers receive the subsidy, P = Pd = 10 and Ps = Pd + 20 = 30. The surplus
implications of the subsidy are shown below:

With No Subsidy

With Subsidy

Impact of the
Subsidy

A+B

A+B+C+F+G

C+F+G

($28,125)

($40,500)

($12,375)

C+E

C+E+B+I

B+I

($9,375)

($13,500)

($4,125)

Government spending on
subsidy

Zero

B+C+F+G+H+I

-B-C-F-G-H-I

($18,000)

(-$18,000)

Net benefits (consumer

surplus + producer
surplus government
spending)

A+B+C+E

A+B+C+E-H

-H

($37,500)

($36,000)

(-$1,500)

Deadweight loss

Zero

H ($1,500)

H ($1,500)

Consumer surplus

Producer surplus

Microeconomics I, IUPNA

P
100

A
S

30
25

C
10

B
F

S - 20
D

750

900

1,000

9. In a perfectly competitive market, the market demand curve is Qd = 10 Pd, and the
market supply curve is Qs = 1.5Ps.
a) Verify that the market equilibrium price and quantity in the absence of government
intervention are Pd = Ps = 4 and Qd = Qs = 6.
b) Consider two possible government interventions: (1) A price ceiling of $1 per unit; (2) a
subsidy of $5 per unit paid to producers. Verify that the equilibrium market price paid by
consumers under the subsidy equals $1, the same as the price ceiling. Are the quantities
supplied and demanded the same under each government intervention?
c) How will consumer surplus differ in these different government interventions?
d) For which form of intervention will we expect the product to be purchased by consumers
with the highest willingness to pay?
e) Which government intervention results in the lower deadweight loss and why?
a)

10 P = 1.5P P = 4 and Q = 10 4 = 6.

Microeconomics I, IUPNA

b)
Under a $5 subsidy paid to producer, market price P = Pd and the after-subsidy price
received by producers is Ps = Pd+5. Thus: 10 P = 1.5(P + 5) P = 1.

c)
Consumer surplus under the subsidy will be greater than the consumer surplus under a
price ceiling. Under both interventions, consumers pay the same price, but under subsidies
consumers are supplied as much as they demand at the $1 market price, while under price
ceilings, consumers get less than they demand at the $1 ceiling price.

d)
Subsidies. Under subsidies, because consumers get what they demand at the market price,
there is no possibility of consumers with a lower willingness to pay getting the good while
consumers with a higher willingness to pay do not get the good. This is a possibility with a price
ceiling.

e)
The subsidy has the smaller deadweight loss. The deadweight loss under the price ceiling
(assuming efficient rationing) is area C+H+I, which equals 16.875. The deadweight loss under
the subsidy is area L, which equals 7.5.

P
10
A

L
I

F
1

S-5

D
1.5

10

Microeconomics I, IUPNA

10. Consider a perfectly competitive market in which the market demand curve is given by
Qd = 20 2Pd and the market supply curve is given by Qs = 2Ps.
a) Find the equilibrium price and quantity in the absence of government intervention.
b) Suppose the government imposes a price ceiling of $3 per unit. How much is supplied?
c) Suppose, as an alternative, the government imposes a production quota limiting the
quantity supplied to 6 units. What is the market price under this type of intervention? Is
the quantity supplied under the price ceiling greater than, less than, or the same as the
quantity under the production quota?
d) Assuming that under price controls rationing is as efficient as possible and under the
quota, the allocation is as efficient as possible, under which program is the deadweight loss
larger: the price ceiling or the production quota?
e) Assuming that under price controls rationing is as inefficient as possible, while under the
quota the allocation is as efficient as possible, under which program is the deadweight loss
larger: the price ceiling or the production quota?
f) Assuming that under price controls rationing is as inefficient as possible, while under the
quota the allocation is as inefficient as possible, under which program is the deadweight
loss larger: the price ceiling or the production quota?
a)
Letting P = Pd = Ps denote the market price in the absence of government intervention,
we have: 20 2P = 2P P = 5. The equilibrium quantity is this 10 units.

b)
The quantity supplied under a price ceiling of $3 per unit is 6 units, as shown in the first
picture below.

c)
The market-clearing price when a production quota of 6 is imposed is given by
6 = 20 2P or P = 7.

d)
Referring to the graph below, the deadweight loss under a 6 unit production quota
(assuming efficient allocation of quotas) and the deadweight loss under a $3 per unit price ceiling
(assuming efficient rationing) are the same and equal area C + F.

Microeconomics I, IUPNA

e)
The deadweight loss under a $3 price ceiling with inefficient rationing is equal to areas
B+C+E+F, which works to be $32. This is necessarily bigger than the deadweight loss under the
production quota because inefficient rationing entails an additional deadweight loss (area B + E)
that is not present with a price ceiling with efficient rationing.

f)
In this case, the deadweight loss under a production quota in which allocation is as
inefficient as possible is the same as the deadweight under a price ceiling in which the rationing
is as inefficient as possible. Heres why. In the second picture below, producer surplus when the
quota is rationed to the highest cost producers willing to produce at the market-clearing price
with a 6-unit quota is given by the shaded triangle. The area of this triangle is equal to the area of
triangle G. Consumer surplus under the quota is area A, for a total surplus of A+G (this is more
easily seen in the first picture below). In the absence of a quota, total surplus is A+B+C+E+F+G.
The deadweight loss is thus B+C+E+F, the same as it would be with a price ceiling of $3 and the
most inefficient rationing possible.

P
10

S
A

7
B

E
3
G

D
6

10

20

Microeconomics I, IUPNA

P
10

S
A

7
B
5
4

C
F

3
G
D
6

10

14

20

11. Figure 10.18 below shows the supply and demand curves for cigarettes. The
equilibrium price in the market is $2 per pack if the government does not intervene, and
the quantity exchanged in the market is 1,000 million packs. Suppose the government has
decided to discourage smoking and is considering two possible policies that would reduce
the quantity sold to 600 million packs. The two policies are (i) a tax on cigarettes and (ii) a
law setting a minimum price for cigarettes. Analyze each of the policies, using the graph
and filling in the table on the next page.

Microeconomics I, IUPNA

a)
Based on the graph, the government would need to set a tax of $2.00 per unit to achieve
the governments target of 600 million units sold. By setting a tax at $2.00, the supply curve will
Q 600
P $3.00
shift upward by $2.00 and intersect the demand curve at
and
, the new market
equilibrium. Alternatively, the government could set a minimum price (price floor) at P = $3.00,
at which point consumers would only demand Q = 600 million units.
b)
Tax

Minimum Price

What price per unit would consumers pay?

$3.00

$3.00

What price per unit would producers receive?

$1.00

$3.00

What area represents consumer surplus?

Microeconomics I, IUPNA

What area represents the largest producer

surplus under the policy?

B+C+E

What area represents the smallest producer

surplus under the policy?

G+H+L+T

What area represents government receipts?

C+E

Zero

What area represents smallest deadweight

loss possible under the policy?

G+L

G+L

12. The market demand for sorghum is given by Qd = 500 10Pd, while the market supply
curve is given by Qs = 40Ps. The demand and supply curve are shown below. The
government would like to increase the income of farmers and is considering two alternative
government interventions: an acreage limitation program and a government purchase
program.

a) What is the equilibrium market price in the absence of government intervention?

b) The governments goal is to increase the price of sorghum to $15 per unit. This is the
support price. How much would be demanded at a price of $15 unit? How much would
farmers want to supply at a price of $15 per unit? How much would the government need
to pay farmers in order for them to voluntarily restrict their output of sorghum to the level
demanded at $15 per unit?
c) Fill in the following table for the acreage limitation program:

Microeconomics I, IUPNA

d) As an alternative way to support a price of $15, suppose the government purchases the
difference between the quantity demanded at a price of $15 and the quantity supplied. How
much does the government spend on this price support program?
e) Fill in the following table for the government purchases program:

a)
Let P = Pd = Ps denote the market equilibrium price in the absence of government
intervention. The market equilibrium price is found by solving 500 10P = 40P, which gives us
P = $10. The equilibrium quantity is 500 10(10) = 400 units.

b)

If the government designates a support price of $15, the quantity demanded would be 500
10(15) = 350 units, while the quantity supplied would be 40(15) = 600 units.

c)

(See figure below)

Microeconomics I, IUPNA

With no
program

With acreage
limitation program

Impact of
program

A+B+C

-BC

($8,000)

($6,125)

(-$1,875)

G+F

G+F+B+C+E

B+C+E

($2,000)

($4,500)

($2,500)

Impact on the
government budget

Zero

-F-C-E

-F-G-E

(-$781.25)

(-$781.25)

Net benefits (consumer

surplus + producer
surplus-government
expenditure

A+B+C+G+F

A+B+G

-C-F

($10,000)

($9843.75)

($156.25)

Deadweight loss

$0

C+F

C+F

($156.25)

($156.25)

Consumer surplus

Producer surplus

d)
As shown in the figure below, the quantity supplied at a price of $15 per unit is 4(15) =
600 units, while the quantity demanded is 500 10(15) = 350 is the quantity supplied. Thus the
government will support the price of $15 by purchasing 250 units at a price of $15 or $3,750.

Microeconomics I, IUPNA

50

15
10

B
G

0
F

e)

500

350

600

The entries in the table refer to the figure below:

With no
program

With government
purchase program

Impact of
program

A+B+C

-B-C

($8,000)

($6,125)

(-$1,875)

G+F

G+F+B+C+E

B+C+E

($2,000)

($4,500)

($2,500)

Impact on the government

budget

zero

-F- C- E- J- I- H

- F-C-E- J- I- H

(-$3,750)

(-$3,750)

Net benefits (consumer

surplus + producer surplusgovernment expenditure

A+B+C+G+F

A+B+G J I H

- F- C- J- I- H

($10,000)

($6,875)

(-$3,125)

Deadweight loss

zero

F+C+J+I+H

F+C+J+I+H

Consumer surplus

Producer surplus

Microeconomics I, IUPNA

($3,125)

50

($3,125)

D + government
purchases

A
S

15
10

350

E
I
400

J
500

600

13. The domestic demand curve for portable radios is given by Qd = 5000 100P, where Qd
is the number of radios that would be purchased when the price is P. The domestic supply
curve for radios is given by Qs = 150P, where Qs is the quantity of radios that would be
produced domestically if the price were P. Suppose radios can be obtained in the world
market at a price of $10 per radio. Domestic radio producers have successfully lobbied
Congress to impose a tariff of $5 per radio.
a) Draw a graph illustrating the free trade equilibrium (with no tariff). Clearly illustrate
the equilibrium price.
b) By how much would the tariff increase producer surplus for domestic radio suppliers?
c) How much would the government collect in tariff revenues?
d) What is the deadweight loss from the tariff?

Microeconomics I, IUPNA

a)
60.00

Domestic Demand

Price

50.00
40.00

Domestic Supply

30.00
20.00
PW

10.00
0.00
0

1000

2000

3000

4000

5000

Quantity

In the free trade equilibrium, domestic demand will be 4000, domestic supply will be 1500, and
imports will be 2500 units.

(10 0)(1500) 7,500

b)
The producer surplus with free trade would be
domestic supply will increase to 2250 and producer surplus will increase to
1 (15 0)(2250) 16,875
2
. So producer surplus will increase by 9,375.

. With the tariff,

c)
With the tariff, domestic demand will fall to 3500 units and domestic demand will
increase to 2250 units. Thus, 1250 units will be imported. A tariff of $5 on each of those units
will result in government receipts of 6,250.
d)

The deadweight loss from the tariff will come from two sources. First, the deadweight
1 (2250 1500)5 1,875
2
loss associated the overproduction of domestic suppliers will be
.
Second, the deadweight loss associated with the reduction in consumption by consumers due to
1 (4000 3500)5 1, 250
2
the tariff is
. Therefore, the total deadweight loss with this tariff is
3,125.

Microeconomics I, IUPNA

14. Suppose that the domestic demand for television sets is described by Q = 40,000 180P
and that the supply is given by Q = 20P. If televisions can be freely imported at a price of
$160, how many televisions would be produced in the domestic market? By how much
would domestic producer surplus and deadweight loss change if the government introduces
a $20 tariff per television set? What if the tariff was $70?

When televisions can be freely imported at a price of PW = $160, domestic producers will
produce 20(160) = 3200 television sets. Domestic demand is 40,000 180*160 = 11,200 units.

When the import duty of $20 is introduced, the effective price of importing televisions is $180.
At this price, domestic firms will supply 20(180) = 3600 televisions, and demand will be 40,000
180(180) = 7600. Domestic producer surplus will increase by area C = (180 160)(3200) +
0.5(180 160)(3600 3200) = 68,000. The tariff creates a deadweight equal to area F + K =
0.5(180 160)(3600 3200) + 0.5(180 160)(11,200 7600) = 40,000.
An import duty of $70 raises the effective import price to $230. You can see from the graph that
this is above the equilibrium price of $200 that would prevail in the domestic market without any
foreign trade. Thus, imposing such a high import duty is equivalent to banning trade in this
industry altogether. The new price will be $200 and the quantity demanded 4000. Relative to
the free trade equilibrium, producer surplus would now increase by area B + C = 0.5(200)(4000)
0.5(160)(3200) = 144,000. The $70 import tariff creates a deadweight loss equal to area F + G
+ J + K = 0.5(200 160)(11,200 3200) = 160,000.

15. Suppose that demand and supply curves in the market for corn are Qd = 20,000 50P
and Qs = 30P. Suppose that the government would like to see the price at $300 per unit and

Microeconomics I, IUPNA

is prepared to artificially increase demand by initiating a government purchase program.

How much would the government need to spend to achieve this? What is the total
deadweight loss if the government is successful in its objective?

Without government intervention, equilibrium occurs where 20,000 50P = 30P, or P = 250 and
Q = 7500.
If the price were to be pushed up to $300, suppliers would like to produce 30(300) = 9000 units.
However, demand would be just 20,000 50(300) = 5,000 units. Therefore the government must
buy the difference, that is 4,000 units. At $300 each, total government expenditure is $1.2
million. Relative to no government intervention, area A remains consumer surplus and C
remains producer surplus, while area B is transferred from consumers to producers. To find
deadweight loss, note that area E + F represents potential benefits no longer captured by anyone,
while area G + H + J + K represents production costs that are incurred for units of corn that no
one consumes. Thus deadweight loss is equal to area E + F + G + H +J + K. Alternatively, you
can think of the deadweight loss as total government expenditures minus area L, or area (E + F
+ G + H +J + K + L) L = 300(9000 5000) 0.5(300 250)(9000 5000) = $1,100,000.