Question

4) Welfare Analysis: Price Ceiling (10 points) Price ($) Supply Demand 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 Quantity Now imagine a price ceiling of $30. f. What effect does this have on Consumer and Producer Surplus? Start by clearly labeling the new CS and PS on the graph. g. What are the new dollar values for producer, consumer, and total surplus? h. Is there a Deadweight Loss? Find its value by calculating the change in total surplus. i. Label the DWL on your graph and calculate the area of the triangle. Does this number match up with your answer from (h)?

Answer 1

PRICE SUPPLY Consumer Surplus DWL Price Producer Surplus Ceiling DEMAND 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 Quantity

f. Price ceiling Increases the consumer surplus and decreases the producer surplus.

g. New producer surplus=0.5(30)(40)= $600

New consumer surplus=0.5(90-60)*40+(60-30)*40= $600+$1200= $1800

New Total surplus= $600+$1800=$2400

h. Yes there is deadweight loss= Old total surplus- New total surplus

= 0.5(90)(60)- $2400

= $300

i. Deadweight loss=0.5(60-30)(60-40)= $300

yes this number match from answer in part (h).

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