Suppose market demand and supply are given by Qd = 100 − 2P and Qs = 5 + 3P. If the government sets a price floor of $30 and agrees to purchase all surplus at $30 per unit, the total cost to the government will be:
(A) 1650
(B) 1375
(C) 900
(D) 1125

$1650

Explanation:

Quantity Demanded = 100 - 2P

Quantity Supplied = 5 + 3P

Price floor = $30

To get quantity demanded and quantity supplied, put the value of price into the functions given.

Qd = 100 - 2P

= 100 - 2(30)

= 100 - 60

= 40

Qs = 5 + 3P

= 5 + 3(30)

= 5 + 90

= 95

Since quantity supplied is 95 and quantity demanded is 40, the surplus will be 95 minus 40 which gives a value of 55.

Since the government has agreed to buy every surplus for $30,

Value of surplus= 55 units × $30 = $1650.

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