Consider the following supply and demand equations, in the market for laddus: Supply:p= (1/5)q, Demand:p= 30−q. The government wants people to enjoy laddus at a reasonable price, and so enacts a price ceiling of ̄p= 1. What is the deadweight loss under this price ceiling?
We have the following information
Supply: p = (1/5)q
Demand: p = 30 – q
Equilibrium is achieved at the intersection of demand and supply curves
30 – q = (1/5)q
30 = (1/5)q + q
30 = (6/5)q
Equilibrium quantity (q) = 25
p = 30 – q
p = 30 – 25
Equilibrium price (p) = 5
The equilibrium is signified by point e in the diagram below
Now, it is given that government has introduced a price ceiling of p = 1. At this price, the quantity demanded is
p = 30 – q
1 = 30 – q
Quantity demanded at price 1 = 29
However, at the price of 1 the quantity that the sellers are ready to sell is
p = (1/5)q
1 = (1/5)q
Quantity supplied at price 1 = 5
So, the shortage is of 24 units
For the 5 units that the suppliers are ready to sell at price 1, the consumer is willing to pay
p = 30 – q
p = 30 – 5
Price consumers are willing to pay for 5 units is 25.
The Deadweight loss generated by the price ceiling is signified by the shaded area of triangle def.
Area of a triangle = (1/2) × Base × Height
Deadweight loss = (1/2) × 24 × 20
Deadweight loss = 240
Consider the following supply and demand equations, in the market for laddus: Supply:p= (1/5)q, Demand:p= 30−q....
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