Question

Figure 4-10 Figure 4-10 shows the market for apartments in Bay City. Recently, the government imposed a rent ceiling at RO. 1) Refer to Figure 4-10. What is the area that represents the portion of producer surplus transferred to consumers as a result of the rent ceiling? A) D+E B) D+F CD DF 2) Refer to Figure 4-10. What area represents the deadweight loss after the imposition of the ceiling? A) G+ H B ) J+ H C ) C + E + J +H D) C+E 3) Refer to Figure 4-10. Suppose that instead of a price ceiling, the government imposed a price floor of RI. What is the area representing consumer surplus after the imposition of the price floor? A) A B) A+ B +D C) C+E D) B + C+D+E 4) Refer to Figure 4-10. Suppose that instead of a price ceiling, the government imposed a price floor of RI. What is the area representing producer surplus after the imposition of the price floor? A) A B) B+D+F C) C + E D) B + C + D +E+F

Answer 1

Ans. 1) C) D

Before Rent Ceiling, Consumer surplus = A +B+C and Producer surplus = D+E+F

After Rent ceiling, Consumer surplus = A+B+D and Producer surplus = F

Hence, producer surplus transferred to the consumer after Rent Ceiling is D and rest is the amount of deadweight loss = C+E

Ans. 2) D) C+E

Area C represents the deadweight or efficiency loss to consumers and area E represents the deadweight loss or efficiency loss to producers.

Ans. 3) A) A

consumer surplus before the imposition of price floor = A+B+C and producer surplus = D+E+ F

After the imposition of the price floor, consumer surplus = A and Producer surplus = B+ D +F

Deadweight loss = C+E

Ans.4) B) B+D+F

Before the imposition of price Floor, the producer surplus = D+E+F

After the imposition of price Floor, the producer surplus = B+ D+F

portion B is taken out from the consumer surplus and portion E leads to the deadweight loss or efficiency loss due to the imposition of the price floor.