Question

Problem 6-3 

The figure below shows a market in equilibrium. 

a. Draw a price ceiling at $12. Instructions: 

Use the tool provided (Ceiling-) to draw the price ceiling. 

The amount of shortage at this price is _______ 

The deadweight loss is _______ 

b. Draw a price ceiling at $4 

Instructions: Use the tool provided (Ceiling2) to draw the price ceiling. 

The amount of shortage at this price is _______ 

Draw the deadweight loss associated with this price ceiling. 

Instructions: Use the tool provided (DWL) to draw the deadweight loss for a price ceiling of $4. 

The deadweight loss is _______ 

Answer 1

(a)

In the given case, market is in equilibrium at price of $8 per unit and the quantity of 6 units.

Price ceiling can only be effective if the price fixed is below the equilibrium price.

The price ceiling is fixed at $12 per unit.

The equilibrium price is $8 per unit.

Since, price ceiling is fixed at price greater than the equilibrium price, the price ceiling would not be effective and the market would operate at equilibrium.

Thus,

The amount of shortage at this price is 0 units.

The dead weight loss is $0.

Following is the required graph -

(b)

In the given case, market is in equilibrium at price of $8 per unit and the quantity of 6 units.

Price ceiling can only be effective if the price fixed is below the equilibrium price.

The price ceiling is fixed at $4 per unit.

The equilibrium price is $8 per unit.

Since, price ceiling is fixed at price lower than the equilibrium price, the price ceiling would be effective.

Quantity demanded at $4 per unit = 8 units

Quantity supplied at $4 per unit = 2 units

So,

Shortage = Quantity demanded - Quantity supplied = 8 units - 2 units = 6 units

Thus,

The amount of shortage at this price is 6 units.

Calculate the dead weight loss -

DWL = 1/2 * ($16 - $4) * (6 - 2) = 1/2 * $12 * 4 = $24

The dead weight loss is $24.

Following is the required graph -