NAME: DEC 152-Quiz #3-REVIEW can cause a misallocation of resources if 1. A pric
ID: 1156795 • Letter: N
Question
NAME: DEC 152-Quiz #3-REVIEW can cause a misallocation of resources if 1. A price the sellers who remain in the market have higher costs than the sellers who leave the market Price icecan cause a misallocation of resources if the buyers who remain in the market value the good less than do the buyers who leave the market 21 p n 515 $12 $7.50 1.50 Use the figure to the left to answer questions 3-6. Consider only one market intervention at a time. In other words, all of the questions should be considered separate from all of the others 27 Quantity 3. How much deadweight loss would be caused by a $9 tax in this market? How much consumer surplus would there be after a subsidy in this market that Increases quantity to 277 5. What is the minimum amount of deadweight loss caused by a $21 price floor in this market? FREEZEExplanation / Answer
1. A price decrease can cause misallocation of resources if sellers who remain in the market have higher costs than the sellers who leave the market because a price decrease may not be able to sustain sellers with higher costs in the market.
2. A price increase can cause misallocation of resources if the buyers who remain in the market value the good less than the buyers who leave the market because the increase in prices will reduce the incentives of the existing buyers to stay in the market.
3. The equilibrium price is 15. With a tax of 9, the prices will increase to 21 at which the quantity is 9. The deadweight loss in this case will be q+j
4. Increasing the quantity to 27 after a subsidy would lead to a consumer surplus of a+b+c+e+g+h+j+k+q+r+s i.e. the area between the demand curve and the price corresponding to quantity of 27 i.e 1.50 in this case
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