Question

3. If we place a price ceiling of $15 do we have a surplus or shortage? By how much? Label producer surplus, consumer surplus, and dead weight loss. What is the quantity sold? Calculate the area of consumer surplus, producer surplus, and dead weight loss. $60 $40 $20 20 40

Answer 1

Answer;

If we place a price ceiling, we have shortage by 20 units of quantity.

The effect of price ceiling will be presented in the following graph:

29

After the price ceiling, the quantity sold will be 20 units.

Area of consumer surplus can be calculated by calculating the values of the area of three geometrical shapes and then by adding them up.Similarly producer surplus is the area of triangle and dead weight loss is, again, the area of the big triangle which is formed by two smaller triangles.

Consumer surplus = (½ * 10 * 20 = 100) + ( 10 * 20 = 200) + (½ * 5 * 20 = 50)

= 100 + 200 + 50 = 350

Producer surplus = ½ * 20 * 5 = 50

Dead weight loss = ½ * 15 * 20 = 150

All values can be expressed in terms of dollar.

Therefore, Consumer surplus is $ 350

Producer surplus is $ 50

Dead weight loss is $ 150