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1. The diagrams below show the supply and demand curves in the market for widgets. In each diagram the free market equilibrium price and quantity are p∗ and Q∗.

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a. In the first diagram, if the price of widgets is at its marketclearing equilibrium level, p∗, identify the areas on the graph that sum to this market’s total economic surplus.

 

b. In the first diagram, suppose the government imposes a price ceiling at price p1. Identify the areas on the graph that represent the reduction in economic surplus as a result of this price control.

 

c. In the second diagram, if the price of widgets is at its market-clearing equilibrium level, p∗, identify the areas on the graph that sum to this market’s total economic surplus.

 

d. In the second diagram, suppose the government imposes a price floor at price p2 .Identify the areas on the graph that represent the reduction in economic surplus as a result of this price control.

 

e. For both diagrams, describe the effect on market efficiency of the price controls. Is society as a whole better off?

 

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