Question

For the questions below, answer either true or false. If you answer true, explain why it is true. If you answer false, give a counter-example. In all three examples you may assume demand slopes downward and supply slopes upward (that is, neither curve is either perfectly vertical or horizontal), and that both curves are smooth (like they are in the rent control questions, not discrete like they were in homework 2). A. In the simple model of supply and demand covered in this class, a binding price ceiling will . In the simple model of supply and demand covered in this class, a binding price ceiling will . In the simple model of supply and demand covered in this class, a binding price ceiling will always decrease total surplus always decrease producer surplus always decrease consumer surplus Rent control (and similar price ceilings) are often proposed as a way to reduce inequality by making housing more affordable for the poor. But given your answers to Questions 1-7, can rent control also increase some forms of inequality? (Hint: think about what excess demand/a shortage implies for people seeking an apartment.) B. C. In lecture I gave you steps for calculating the deadweight loss of a price ceiling. Suppose instead there were a binding price floor (that is, the price is held above the equilibrium price). Propose a set of steps for calculating the deadweight loss of a binding price floor. (Hint: draw a diagram with a binding price floor, identify the deadweight loss triangle, and think about how the steps given in lecture must be adjusted to calculate the base and height of that triangle.)

Answer 1

Answer:

A)

True

True

False

Initial producer surplus = c + f + d consumer surplus = a + b + e Total surplus = a + b + c + d + e + f After price ceiling producer surplus = d consumer surplus = a + b + c Total surplus = a + b + c + d \r\n The market demand and supply are drawn, along with the price flooring which is putted in the market by the government for some reason. In this case, no price below that price floor can be charged in the market. Hence, at that price CB is demanded from the consumers while producers are willing to supply much more than CB. The quantity demanded, since is less, will be the equilibrium quantity in the market. Comparing to the usual equilibrium in the market, there is a loss of consumer as well as producer surplus, and that very loss accounts to the deadweight loss. In the

C. The graph is as below.

The market demand and supply are drawn, along with the price flooring which is putted in the market by the government for some reason. In this case, no price below that price floor can be charged in the market. Hence, at that price CB is demanded from the consumers while producers are willing to supply much more than CB. The quantity demanded, since is less, will be the equilibrium quantity in the market. Comparing to the usual equilibrium in the market, there is a loss of consumer as well as producer surplus, and that very loss accounts to the deadweight loss. In the graph, the deadweight loss can be depicted by area of the triangle ABE.

The height of the triangle will be the loss in the equilibrium quantity, which is basically the previous quantity demanded minus the current quantity demanded. The base of the triangle will be the current price floor minus the previous price of the suppliers at the current quantity, which is BA. BA can also be taken as current price minus the price corresponding to the current quantity of the suppliers.