Impose a price ceiling and calculate the deadweight loss
Three steps, the way the exam actually works: work through the lab, write down your own measurements, then answer a 7-point free response. What you recorded goes to the grader with your writing, so a conclusion that does not follow from your own numbers will cost you the point — exactly as it would with a real reader.
Run the investigation
- 1Make sure no curve has been shifted and no price control is active, then record the equilibrium price and quantity.
- 2Record the consumer surplus and producer surplus the lab reports for that free-market equilibrium.
- 3Switch the price control to a ceiling and set the controlled price to 45. Record the shortage the lab reports.
- 4Work out how many units actually change hands at that ceiling — it is the smaller of quantity demanded and quantity supplied.
Booting the lab…
Record what you measured
These are your numbers, not ours. The grader sees them, so your conclusions have to follow from what you actually recorded.
| Free-market equilibrium price P* | |
|---|---|
| Free-market equilibrium quantity Q* | |
| Consumer surplus at the free-market equilibrium | |
| Producer surplus at the free-market equilibrium | |
| Shortage with the ceiling set at 45 | units |
| Units actually exchanged at the ceiling | units |
Answer the free response
In this market the demand curve is P = 100 − Q and the supply curve is P = 20 + Q. (a) State the free-market equilibrium price and quantity from your data, and explain why a ceiling set at 45 is binding while a ceiling set at 80 would not be. (b) Using your recorded shortage, explain why a shortage appears at the controlled price and identify the quantity actually exchanged. (c) Calculate the deadweight loss created by the ceiling. Show your work, including how you found the base and height of the relevant area. (d) Identify one group made better off and one group made worse off by the ceiling, and describe one non-price mechanism by which the limited units might end up being allocated.
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