A.) Is there a deadweight loss associated with a price ceiling of 15 in the econ
ID: 1173824 • Letter: A
Question
A.) Is there a deadweight loss associated with a price ceiling of 15 in the economy? If so, calculate it.
Not efficient. The deadweight loss is 400.
Not efficient. The deadweight loss is 112.5.
Not efficient. The deadweight loss is 225.
It is efficient.
B.) Is there a deadweight loss associated with a price floor of 15 in the economy? If so, calculate it.
Not efficient. The deadweight loss is 225.
Not efficient. The deadweight loss is 400.
Not efficient. The deadweight loss is 375.
It is efficient.
C.)
Is there deadweight loss at the market price in this economy? If so, calculate it.
Not efficient. The deadweight loss is 225.
Not efficient. The deadweight loss is 400.
Not efficient. The deadweight loss is 112.5.
It is efficient.
Not efficient. The deadweight loss is 400.
Not efficient. The deadweight loss is 112.5.
Not efficient. The deadweight loss is 225.
It is efficient.
Explanation / Answer
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Answer
The equation for demand curve is given by P=50-1*1/2Q
And equation for supply curve is given by P= 3*2*q
The price ceiling that we have =15
To calculate deadweight we have to calculate if there is base demand and supply of the product for the same we have as below-
Demand
P= 50-1*1/2*15
P=42.5
Supply
P=3*2*15
P=90
Hence there is base
Based on the above we can say that the situation is not efficient and has deadweight as below-
90+42.5-20 = 112.5
the above represents the combined demand and supply with respect to the excess commodity of 20
Hence option B is correct.
If there is price floor of 15 and not Price ceiling then we have to calculate the demand and supply as above only
Demand
P= 50-1*1/2*15
P=42.5
Supply
P=3*2*15
P=90
Since the price is the floor price then the supply being higher than the demand indicated that there is no deadweight. So option D is correct.
Since there is no deadweight loss in case of floor price at 15 we can say that the system is efficient. However the ceiling price at 15 produces a deadweight of 112.5 indicating that the market is not efficient and the option C is correct as the re is loss of 112.5.
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