Question

The demand and supply schedules for hot dogs are:

Price                      Quantity                              QUANTITY

cENTS                    demanded                          supllied

40                           170                                         90

50                           160                                         100

60                           150                                         110

70                           160                                         120

80                           150                                         130

90                           140                                         140

100                         130                                         150

110                         100                                         160

THE GOVERNMENT SETS A PRICE CEILLING ON HOT DOGS AT $1.00.

1. What is the shortage or surplus created by the price ceiling?
2. What is the deadweight loss incurred?

Answer 1

Answer

a.
Price ceilings are price restrictions that impose the maximum price that can be charged for a good. They can be binding or non-binding. A price ceiling of $1 is above the equilibrium price of 90 cents(Equilibrium is established where the quantity demanded and quantity supplied are equal) and hence it will be non-binding. Thus, there will be no shortage or surplus as the equilibrium price would hold.
b.
A non-binding price ceiling is present if the ceiling price is above the equilibrium price. In the given question the ceiling price of $1 is above the equilibrium price of 90 cents and it is non-binding. There will be no shortage or surplus and so no deadweight loss will be created.