Question
Asked Jan 3, 2020
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Suppose Hong Kong is experiencing an economic recession. Explain with a diagram how the decrease in household income affects the equilibrium price, equilibrium quantity, consumer surplus, producer surplus, total surplus, and deadweight loss in the market for computers.

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Expert Answer

Step 1

Recession refers to the situation of lower economic activity. The market for computers before ression  is represented in figure 1 as follows:

Economics homework question answer, step 1, image 1
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Step 2

Figure (1) shows that before recession, equilibrium price and equilibrium quantity is equal to P and Q respectively.

The difference between consumer’s maximum willingness to pay and actual price is known as consumer surplus. The area of the triangle PEG depicts consumer surplus before recession.

The difference between the actual price and producer’s minimum willingness to receive is known as producer surplus. The area of the triangle PEA depicts producer surplus before recession.

The sum of consumer surplus and producer surplus gives total surplus. Thus, total surplus is equal to the area of the triangle AEG in the figure (1) before recession.

The fall in economic efficiency due to loss of free market equilibrium leads to dead weight loss. There is no dead weight loss in the economy before recession. As the economy experiences free market equilibrium.

Step 3

The following figure ( figure 2) shows...

Economics homework question answer, step 3, image 1
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