Question

Suppose a city imposes a price floor on hamburgers sold at restaurants.

(a) On a diagram show the resulting loss of total social surplus if rationing is efficient.

(b) Explain how the loss of total surplus would change if rationing were inefficient.

Answer 1

a. Rationing is efficient when the city imposes price floor at the prive level achieved at equilibrium. Due to this, there is no loss in social surplus (as clearly suggested by efficient rationing)

b. When rationing is inefficient, this means price level is above the equilibrium level of price achieved due to intersection of demand and supply of hamburgers in the city.