Consider a market where supply and demand are given by QXS = -16 + PX and QXd = 92 – 2PX. 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.
