In: Economics
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.
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