Question

November 1st, 2019 Sehaj kahlon 3043301 ECON 101-GS09: Assignment (15%) Instructor: Nusrat Aireen Student Full Name: Assignment is due on November 01, 2019 by 12:00 pm in class. Please do not send me any soft copy. I want hand written paper copy. Be careful about plagiarism. Q.1. The following figure shows a market in equilibrium (5 marks) Price 152 22 Price ceiling la) Price Ceiling (6) 3 4 9 11 12 5 6 7 8 Oy a) Draw a price ceiling at $12. What is the amount of shortage at this price? Draw and calculate the deadweight loss. (Show your detail calculation) b) Draw a price ceiling at $4. What is the amount of shortage at this price? Draw and calculate the deadweight loss. (Show your detail calculation)

Answer 1

(a) The ceiling price of $12 is imposed above equilibrium price of $8 (at intersection of demand and supply curves). Since price ceiling is effective only when imposed lower than equilibrium price, in this case ceiling price is ineffective, and the market clears at price of $8 and quantity of 6. So there is no deadweight loss.

Consumer surplus (CS) = Area between demand curve and price = (1/2) x $(20 - 8) x 6 = 3 x $12 = $36

Producer surplus (PS) = Area between supply curve and price = (1/2) x $(8 - 2) x 6 = 3 x $6 = $18

Deadweight loss = 0

(b) The ceiling price of $4 is imposed lower than equilibrium price, so in this case ceiling price is effective. Market price will be $4. At this price,

Quantity demanded (Qd) = 8

Quantity supplied (Qs) = 2

Since Qd > Qs, there is a shortage. Since consumers can buy only what producers will sell, market quantity traded is 2.

Shortage = Qd - Qs = 8 - 2 = 6

CS = (1/2) x $[(20 - 4) + (16 - 4)] x 2 = 1 x $28 = $28

PS = (1/2) x $(4 - 2) x 2 = 1 x $2 = $2

Deadweight loss = (1/2) x (Demand price - Ceiling price) x Change in quantity = (1/2) x $(16 - 4) x (6 - 2)

= )1/2) x $12 x 4 = $24