Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 9

Consider a market where supply and demand are given by Q s x =16 + P x and Q d x = 92 - 2 P x. Suppose the government imposes a price floor of $40, and agrees to purchase any and all units consumers do not buy at the floor price of $40 per unit.
a. Determine the cost to the government of buying firms' unsold units.
b. Compute the lost social welfare (deadweight loss) that stems from the $40 price floor.