Price Supply Demand Quantity (Figure: Price Controls) Look at the graph Price Controls. A price floor has been set at point d. The area of deadweight loss that results from this price floor is: O None of these options is correct. O egh ghi fgi
Price Supply Demand Quantity (Figure: Price Controls) Look at the graph Price Controls. A price floor has been set at point d. The area of deadweight loss that results from this price floor is: O None of these options is correct. O egh ghi fgi
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Transcribed Image Text:**Understanding Price Controls:**
The given image contains a supply and demand graph illustrating the concept of price controls. In this graph:
- **Axes:**
- The vertical axis represents Price.
- The horizontal axis represents Quantity.
- **Curves:**
- The upward sloping line represents the Supply curve.
- The downward sloping line represents the Demand curve.
**Key Points on the Graph:**
- The intersection of the Supply and Demand curves represents the market equilibrium.
- A price floor is set at point **d**, which is above the equilibrium price.
**Areas of Interest:**
- The graph is divided into multiple labeled regions: a, b, c, d, e, f, g, h, i, and k.
**Deadweight Loss:**
- Deadweight loss is a measure of economic inefficiency, representing the loss in total surplus. It occurs when the quantity traded is less than the equilibrium quantity.
- The question asks for the area that represents deadweight loss due to the price floor at point **d**.
**Options Given:**
- None of these options is correct.
- egh
- ghi
- fgi
- abe
**Analysis:**
The correct answer represents the triangular area of deadweight loss created by the price floor.
**Educational Perspective:**
This graph serves as an example of how price floors can create inefficiencies in markets by causing surpluses and reducing total economic welfare. Understanding the areas affected helps in analyzing market dynamics and policy impact.
Expert Solution
Step 1
In a free market, the equilibrium price and quantity are determined by the forces of the demand and supply curve.
The demand curve is a downward-sloping curve indicating a negative relationship between price and quantity demanded.
The supply curve is an upward-sloping curve indicating a positive relationship between price and quantity supplied.
Government can interfere in the market by imposing taxes, providing subsidies, or regulating the prices and deviate the market from point of equilibrium.
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