Question

8. Consider the supply and demand diagram below. Assume no externalities. c de 10 20 30 If a price floor of $20 is introduced, then which area will represent the deadweight loss? a) e. b) e + d. c)e+b+d. d) The deadweight loss will be zero. 9. If a price ceiling (set below the initial equilibrium price) is introduced in a market, then: a) Producer surplus definitely decreases. b) Consumer surplus definitely increases. c) Neither a) nor b) are true. d) Both a) and b) are true. 10. In Canada, the prices of most medical services are regulated by the Provinces (that is, they are subject to price ceilings). This type of regulation is likely to result in which of the following (relative to an unregulated market)? a) An increase in the quantity of medical services provided. b) Consumption of medical services such that the marginal benefit is less than the marginal cost c) Lower incomes for providers of medical services. d) Higher tax revenues for Provincial governments.

Show transcribed image text

Answer 1

8) Deadweight loss is the loss of quantity sold due to price floor above the equilibrium price. Initial equilibrium is the point when price is $10 and quantity is 30 units. After the price floor, price is $20 and quantity is 10 units. Thus the deadweight loss is the area d+b+e. Thus option C is correct.

9) If price ceiling is imposed in the market which makes the price below than equilibrium price. Quantity becomes Qp and price becomes Pp after price ceiling. Consumer surplus is initially A+B+C. Initial producer surplus is D+E+F. New consumer surplus is A+B+D and new producer surplus is F and deadweight loss is C+E. Thus both A and B is true which makes option D correct.

frice caling

10) As producer are able to sell less as per the above diagram, their income falls. Option C is correct.