Question

The Ministry of Misallocation has decreed that the production of widgets must be 6000 each month and that the production of gizmos must be 6000 each month. Calculate the deadweight loss in each market caused by these restrictions. Note that the scale of the quantity axis is in thousands.
What is the deadweight loss in the widgets market?
What is the deadweight loss in the gizmos market?

Answer 1

The  deadweight loss that we are tp solve for in the question given are:  $4000 and $20000

How to solve for the deadweight loss

We would have to solve for this by using the values that we have in the figure here

The formula for dead weight loss is given by 1/2× base × height

In the first diagram we can see that there is an underproduction of goods here. For the production to have to rise, there should have to be subsidy. This would help by increasing supply and shifting the curve outward.

This would be

1/2 × (6000-4000)×($7-$3)

= 0.5 x 2000 x 4

= $4000

In the second figure we have the issue that would exist based on the fact that there is an overproduction of goods. Then there would be the imposition of taxes. This would help by moving the supply curve down to the right.

The dead weight loss is given as

1/2× (8000-6000)×($70-$50)

= 0.5 x 2000 x 20

= $20000

Hence the deadweight loss are $4000 and $20000

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