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Refer to the figure. What area represents the deadweight loss after the imposition of the price floor? Price of almonds (dollars per ton) Pd S A Price floor P 00 0 Po E G F Pa Quantity of almonds (tons) A OB+E A-B C D
(d) C + D
This can be explained below as:-
Deadweight loss is caused due to floor price which is an externality.
Floor price is the minimum price legislation which is set by the government and this is the minimum price which can be charged by the sellers and paid by the buyers.
Floor price is always set above the equilibrium which is set at P1
Now, we can see the options and answer where is the deadweight loss area.
Option (a) is wrong because A is the area of consumer surplus. Consumer surplus is the area below the demand curve and above the price set.
Option (b) is wrong because B+ E is the area of producer surplus. Producer surplus is the area above the supply curve and below the price set.
Option (c) is wrong because A+ B is the area of consumer surplus and some part of the producer surplus.
Now, option (d) is right because it is the dead weight loss area. Deadweight loss is the area which means loss in total surplus (consumer+ producer surplus) due to some externality which is here floor price.
So, in the above figure the area left after applying floor price is C+D which is the dead weight loss.