Consider a perfectly competitive market in the short-run with the following demand and supply curves, where...

Consider a perfectly competitive market in the short-run with the following demand and supply curves, where P is in dollars per unit and Q is units per year: Demand: P = 500 – 0.8Q Supply: P = 1.2Q

a. Calculate the short-run competitive market equilibrium price and quantity. Graph demand, supply, and indicate the equilibrium price and quantity on the graph.

b. Now suppose that the government imposes a price ceiling and sets the price at P = 180. Address each of the following questions:

• Draw the price ceiling line on your graph above.

• At P = 180, what is the excess demand (quantity demanded minus the quantity supplied)? Label the quantity demand and quantity supplied at P = 180 on your graph above.

• What is the deadweight loss (DWL) to consumers from the price ceiling? Show your calculations and label or shade the area of DWL in your graph above.

Solutions

Expert Solution

Short run mkt equilibrium price and qty:

Price ceiling at $180

b) After price ceiling

Excess demand = Demand - Supply

Excess demand = 400 - 150

Excess demand = 250

In the diagram, Qs is qty supplied at price ceiling and Qd is qty demanded at price cieling.

Dead weight loss :

Dead weight loss (DWL) = Area of triangle abg = ( B+C)

Area of abg = 1/2 * base* height

= 1/2* (380-180)*( 250-150)

= 1/2* (200) * (100)

= 10000

Rahul Sunny answered 1 year ago

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