UNIVERSITAS SRIWIJAYA

Mata Kuliah : EKONOMI MANAGEMENT

Tim Pengasuh Mata Kuliah :
Nama : Silviana
Nim : 01012681822041

10. Consider a market where supply and demand given by 𝑄𝑥𝑠 = −10 + 𝑃𝑥 and
𝑄𝑥𝑑 = 56 − 2𝑃𝑥 Suppose the government imposes a price floor of $25, and
agree to purchase any and all units consumers do not buy at the floor price of
$25 per unit.
a. Determine the cost to the government of buying firms, unsold units.
b. Compute the lost social welfare (deadweight loss) that stems for the $25
price floor.

Answers:
a. Consider the market before the imposition of the price floor. The market
equilibrium is given by the intersection of the demand and supply curves.
𝑄𝑥𝑠 = 𝑄𝑥𝑑
−10 + 𝑃𝑥 = 56 − 2𝑃𝑥
3𝑃𝑥 = 66
𝑃𝑥 = $22
𝑄𝑥𝑠 = 22 − 10 = 22𝑢𝑛𝑖𝑡𝑠
Hence,
With the price floor of $25, 𝑄𝑥𝑠 = −10 + 25 = 15 𝑢𝑛𝑖𝑡𝑠; 𝑄𝑥𝑑 = 56 − 50 =
6𝑢𝑛𝑖𝑡𝑠. Hence the quantity supplies exceeds the quantity demanded by 9
units, that is there is excess supply of 9 units in the market which the
government will now have to buy.
Hence the cost to government is = 25*9=$225.

b. With the price floor, the equilibrium quantity traded in the market is given
by shorted side of the market, which in this case is the demand side. That,
is, at equilibrium, only 6 units will be bought and sold in the market.
However for every unit between the 6th and 12th unit, the maximum
willingness to pay for that unit (as indicated by the demand curve)
exceeds the marginal cost to produce it (as indicated by supply curve).

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That is for every such additional unit, the imposition of the price floor
reduces the total surplus since these units are left untraded.
At 𝑄𝑥𝑠 = 6, 2𝑃𝑥 = 𝑄𝑥𝑑 + 10 = $16
The deed weight loss is given by the area of triangle ABC (shaded
orange)
DWL = (1/2)*(25-6)*6=3*9=$27

PX
QSx
$28

A
$25 Price floor = $25

$22
C

B
QDx
6 12 Q

11. You are the manager of a midsized company that assembles personal
computers. You purchase most components-such as random-access memory
(RAM) – in a competitive market. Based on your marketing research,
consumers earning over $75.000 purchase 1.3 times more RAM than
consumers with lower incomes. One morning, you pick up a copy of The Wall
Street Journal and read and articles indicating that a new technological
breakthrough will permit manufacture to produce RAM at lower unit cost.
Based on this information, what can you expect to happen to price you pay
for random access memory? Would you answers change if, in addition to this
technological breakthrough, the article indicated that consumer incomes are
expected to grow over the next two years as the economy pulls out of
recession? Explain.

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Answers:
Rising input prices that increase production costs will lead to leftward shift in
the supply curve for RAM chips, resulting in a higher equilibrium price of RAM
chips. If in addition, income falls, the demand for RAM chips will decrease
since they are a normal good. This decrease in demand would tend to
decrease the price of RAM chips in indeterminate. Depending on the relative
magnitude of the decrease in supply and demand, the price you will pay for
chips may rise or fall.