Question

12. Calculate the fictional gain or loss of industry resulting from price ceiling and price floor. 13. Explain the concepts of consumer's surplus and producer's surplus? Draw a graph with demand and supply curves and identify consumer's surplus and producer's surplus.

Answer 1

The first question is solved for you .

12) Price ceilings prevent a price from rising above a certain level . So it is only effective when placed under the equilibrium price . The quantity demanded exceeds quantity supplied at this ceiling price . So there is a scarcity in the market . As for example rent control . To see the profit or loss of an industry we have to see change in producer surplus due to this policy . In graph (a) we see the consumer and producer surplus in equilibrium . After price ceiling in (b) the producer surplus decreases and there is dead weight loss . So industry faces loss of revenue .

Price floor prevent a price from falling below a certain level . Always placed above equilibrium price . The quantity demanded is less than supplied , so there is surplus in the market . The graph (c) shows that producer surplus increased or remained same but consumer surplus decreased . So here industry has profit .

To calculate gain or loss first we have to calculate producer surplus at equilibrium = area of triangle

The we have to calculate producer surplus at ceiling = area of triangle

PS at floor = area of trapezium

The difference between the PS from initial PS gives us net gain or loss .

es Ps a) es BWL PS le >