5Pd, and the market supply curve is given by Qd 35Ps. of price controls. price c
ID: 1151437 • Letter: 5
Question
5Pd, and the market supply curve is given by Qd 35Ps. of price controls. price ceiling of this magnitude? What is the size of the shortage created by the price ceiling? is the net economic benefit in the absence of the price ceiling? rationing of the scarce good is as efficient as possible. What is the net economic benefit in this 2 In a perfectly competitive market, the market demand curve is given by Qd 200 a) Find the equilibrium market price and quantity demanded and supplied in the absence b) Suppose a price ceiling of $2 per unit is imposed. What is the quantity supplied with a c) Find the consumer surplus and producer surplus in the absence of a price ceiling. What d) Find the consumer surplus and producer surplus under the price ceiling. Assume that case? Does the price ceiling result in a deadweight loss? If so, how much is it? e) Find the consumer surplus and producer surplus under the price ceiling, assuming that the rationing of the scarce good is as inefficient as possible. What is the net economic benefit in this case? Does the price ceiling result in a deadweight loss? If so, how much is it?Explanation / Answer
(a) In free market equilibrium, Qd = Qs = Q and Pd = Ps = P.
200 - 5P = 35P
40P = 200
P = $5
Q = 35 x 5 = 175
(b) When P = $2,
Qd = 200 - (5 x 2) = 200 - 10 = 190
Qs = 35 x 2 = 70 (Quantity supplied)
Shortage = Qd - Qs = 190 - 70 = 120 units
(c)
From demand function, when Qd = 0, P = 200/5 = $40 (Reservation price)
Consumer surplus (CS) = Area between demand curve and market price = (1/2) x $(40 - 5) x 175
= (1/2) x $35 x 175
= $3,062.50
From supply function, when Qs = 0, P = 0 (Minimum acceptable price)
Producer surplus (PS) = Area between supply curve and market price = (1/2) x $(5 - 0) x 175
= (1/2) x $5 x 175
= $437.50
Net economic benefit = CS + PS = $(3,062.50 + 437.50) = $3,500
(d) From demand function, 5P = 200 - Qd, therefore P = 40 - 0.2Qd
With price ceiling,
Quantity traded = Min(Qd, Qs) = Min(190, 70) = 70.
When Q = 70,
Demand price = 40 - (0.2 x 70) = 40 - 14 = $26
CS = (1/2) x $[(40 - 2) + (26 - 2)] x 70 = 35 x $(38 + 24) = 35 x $62 = $2,170
PS = (1/2) x $(2 - 0) x 70 = 35 x $2 = $70
Net economic benefit = CS + PS = $(2,170 + 70) = $2,240
Since price ceiling leads to a decrease in net economic benefit, there is a deadweight loss.
Deadweight loss = Loss in net economic benefit = $(3,500 - 2,240) = $1,260
NOTE: As per Chegg Answering Policy, 1st 4 parts are answered.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.