Question

Suppose that a price floor is set in the market for oranges, raising the price from $1.05 per pound to $1.10 per pound of oranges. The sum of which two areas represents the lost social surplus (deadweight loss) from this price floor?

Answer 1

Answer and Explanation:

To calculate deadweight loss, we need to know the initial price and quantity as well as the new price and quantity.

Assume at initial price $1.05, quantity is 300 oranges

At new price $1.10, quantity is 200 oranges

Deadweight loss = 0.5×(P2-P1)×(Q1-Q2)

= 0.5×(1.10-1.05)×(300-200)

Deadweight loss= 0.5×0.05×100

Deadweight loss= 2.5