Question

(1 point) The graph below shows the demand and supply for gasoline, Suppose the government imposes a price ceiling of $4 per gallon of gas. Does consumer surplus rise or fall? ? How much does consumer surplus rise or fall? Does producer surplus rise or fall? ? How much does producer surplus rise or fall? What is the size of the deadweight loss? How much of this deadweight loss is due to too little gasoline being sold? How much of this deadweight loss is due to time wasted in waiting lines? Suppose that everone's time is worth $2 per hour. How long (in hours) must you wait in line to buy a gallon of gasoline?

Answer 1

In this market, the price ceiling of $4 is binding because market price is $6.5

Consumer Surplus changes from A + B + C to A + B + D

= 0.5*(15 – 4 + 11 – 4)*4 – 0.5*(15 – 7.5)*7.5

= 7.875

Hence, consumer surplus increases

Consumer surplus rises by 7.875

Producer surplus falls from D + E + F to now F

Fall in producer surplus = D + E = 0.5*(7.5 – 4)*(7.5 + 4) = 20.125

DWL = C + E = 0.5*(11 – 4)*(7.5 – 4) = 12.25

DWL due to little gasoline sold = E = 0.5*(7.5 – 4)*(7.5 – 4) = 3.125

DWL due to time wasted = 0.5*(11 – 7.5)*(7.5 – 4) = 6.125

Consumer surplus is increased by $7.875 and this is the gain which can be compensated for the loss while waiting. This implies that we can wait for at most 7.875/2 = 3 hours

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