Question

Supply: p= q Demand: p= 200-q

25.The government enacts a price ceiling of $120. What is the new Consumer Surplus?

A)$10,000 (B)$1,000 (C)$2,225 (D)None of the above

26.Assume now that the government enacts a price ceiling of $20. What is the new consumer Surplus?   

A)$3,200 (B)$3,400 (C)$312.50 (D)$6,400

27.When the price ceiling is $20, consumer surplus declines, compared to the marketequilibrium. Why?

(A)The lower prices do not overcome reduced quantity (B)The lower quantity does compensate for higher prices (C)Both A and B

(D)The lower prices create a marginal elasticity of demand

28.What is the Deadweight Loss from a price ceiling of $20?

(A)$3,200 (B)$3,400 (C)$10,800 (D)$6,400

29.What is the Producer Surplus under a price ceiling of $20?

(A)$400 (B)$200 (C)$100 (D)$166.67

30.Which of the following policies is an example of a price ceiling?

(A)Rent controls (B)Minimum wages (C)Taxes (D)Subsidies

Answer 1

Q25.

From the above graph of demand and supply, the equilibrium price is obtained to be P = $100. A price ceiling of $120 is therefore not binding and hence the consumer surplus would be the same as that in equilibrium.

When Equilibrium price = P = $100, Equilibrium quantity = Q = 100

Consumer surplus = 0.5 * Q * ($200 - P) = 0.5 * 100 * ($200 - $100) = 0.5 * 100 * $100 = $5,000

Ans: D. None of the above

Q26. When a price ceiling of $20 is enacted by the government, Quantity supplied = 20 units

Consumer Surplus with the price ceiling of $20 = Area of the shown trapezium = 0.5 * Sum of the parallel sides * Distance between the parallel sides = 0.5 *($180 + $160) * 20 = $3,400

Ans: B. $3,400

Q27. When the price ceiling of $20 is imposed, the quantity consumed decreases while the price decreases. However, the lower prices do not overcome reduced quantity and hence, the consumer surplus decreases.

Ans: A. The lower prices do not overcome reduced quantity

Q28.

Deadweight loss = Area of the triangle = 0.5 * base * height = 0.5 * ($180 - $20)* (100 - 20) = 0.5 * $160 * 80 = $6,400

Ans: D. $6,400