Price Ceiling

A Price Ceiling is the maximum price allowed on the market.

Example

The government sets a price ceiling to $4.

The inverse demand is `P = 14 - Q_D` and the inverse supply is `P = 2 + Q_S`.

After the price ceiling, there are `Q=2` bananas sold at $4.

Consumer surplus is `CS = \left( 12 - 4 \right) \times 2 + \frac{\left( 14 - 12 \right) \times 2}{2} = 16 + 2 = 18`

Producer surplus is `PS = \frac{\left( 4 - 2 \right) \times 2}{2} = 2`

Total Surplus is equal to `TS = CS + PS = 18 + 2 = 20`

The Dead weight loss is equal to `DWL = \frac{\left( 12 - 4 \right) \times \left( 6 - 2 \right)}{2} = 16`

Question

The inverse demand for bananas is P = 188 - 10Q_D. The inverse supply P = 53 + 5Q_S.

The government sets a $63 price ceiling.

What is the market quantity? Calculate the Consumer Surplus, the Producer surplus, Total Surplus, and the Dead Weight Loss.

Plug `P = 63` into the inverse supply function $$ \begin{align*} P &= 53 + 5 Q \\ Q &= \frac{ P - 53 }{ 5 } \\ Q &= \frac{ 63 - 53 }{ 5 } \\ Q &= 2.0 \end{align*} $$

$$ \begin{align*} CS &= \frac{ \left( 188 - 168 \right) \times 2 }{ 2 } \\ &= \frac{ 20 \times 2 }{ 2 } \\ &= \frac{ 40 }{ 2 } \\ &= 20.0 \\ \end{align*} $$

$$ \begin{align*} PS &= \left( 168 - 63 \right) \times 2 + \frac{ \left( 63 - 53 \right) \times 2 }{ 2 } \\ &= 105 \times 2 + \frac{ 10 \times 2 }{ 2 } \\ &= 210 + \frac{ 20 }{ 2 } \\ &= 220.0 \\ \end{align*} $$

$$ \begin{align*} TS &= CS + PS \\ &= 20.0 + 220.0 \\ &= 240.0 \\ \end{align*} $$

$$ \begin{align*} DWL &= \frac{ \left( 168 - 63 \right) \times \left( 9.0 - 2 \right) }{ 2 } \\ &= \frac{ 105 \times 7.0 }{ 2 } \\ &= 367.5 \\ \end{align*} $$
Another Question
Previous lesson Next lesson