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 = 123 - 6Q_D. The inverse supply P = 53 + 8Q_S.

The government sets a $61 price ceiling.

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

Plug `P = 61` into the inverse supply function $$ \begin{align*} P &= 53 + 8 Q \\ Q &= \frac{ P - 53 }{ 8 } \\ Q &= \frac{ 61 - 53 }{ 8 } \\ Q &= 1.0 \end{align*} $$

$$ \begin{align*} CS &= \frac{ \left( 123 - 117 \right) \times 1 }{ 2 } \\ &= \frac{ 6 \times 1 }{ 2 } \\ &= \frac{ 6 }{ 2 } \\ &= 3.0 \\ \end{align*} $$

$$ \begin{align*} PS &= \left( 117 - 61 \right) \times 1 + \frac{ \left( 61 - 53 \right) \times 1 }{ 2 } \\ &= 56 \times 1 + \frac{ 8 \times 1 }{ 2 } \\ &= 56 + \frac{ 8 }{ 2 } \\ &= 60.0 \\ \end{align*} $$

$$ \begin{align*} TS &= CS + PS \\ &= 3.0 + 60.0 \\ &= 63.0 \\ \end{align*} $$

$$ \begin{align*} DWL &= \frac{ \left( 117 - 61 \right) \times \left( 5.0 - 1 \right) }{ 2 } \\ &= \frac{ 56 \times 4.0 }{ 2 } \\ &= 112.0 \\ \end{align*} $$
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