Question

Explain the impacts to the consumer surplus, producer surplus, and deadweight loss if the price floor is below the equilibrium price? w Market demand is given as Qd 100 - 2P and market supply is given as Qs = P + 10. The equilibrium price is $30 and the equilibrium quantity is 40 units. At a price ceiling of $19, calculate the deadweight loss. Answer:

Answer 1

Since the price floor is the legal minimum price which can be charged and it is set above the equilibrium price. It leads surplus of outputs.

So when the price floor is set above the equilibrium price, only then it is effective but when it is set either below the equilibrium price or at the equilibrium price, then it will be ineffective. So there will be no unintended inventory and market gets cleared.

So when price floor is imposed below the equilibrium price, then it will be ineffective. Hence it will not affect consumer surplus, producer surplus and there will be no deadweight loss.

2.

70 S 60 So OWL price Mo 355 30 E 29 price A ceiling 6 Р 20 20 No So 606270 80 90 le Quantity when price ceiling =19 100-(19) =100 - 38 = 62 units. up = 1940 29 uit.

When Q=29 ad = 100-2P 24 = 100-2P Rp = 100-29 P-71 2 P = 35.5 DwL= Area of A =0.5XBXH 205X(46-29 ) (35.5 - 19) -0.5 x 11 x 16.5 = $90.75