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(a) Calculate the total producers surplus at the market equilibrium price and quantity.
so, 20 (height) X 20 (base)/ 2 = 20*20 =400/2 = 200
Answer - 20*20 = 400/2 = 200 (total producers surplus)
AP - Answer - One point is earned for calculating the total producer surplus as (1/2 × 20 × 20) = $200.
(b) If the government imposes a price floor at $16, is there a shortage, surplus or neither?
Remember (floors are high and ceilings are low). A price floor set below the equilibrium price will have no effect as the market will clear.
Answer - at a $16 price floor neither a surplus or a shortage will occur because the $16 is below the equilibrium price,, it is not an effective or binding price floor.
AP - Answer - One point is earned for stating that imposing a price floor at $16 is ineffective and will not create a surplus or a shortage in the market because it is set below the equilibrium price, or because it is
not binding
(c) If instead the government imposes a price ceiling at $12, is there a shortage, a surplus or neither?
A price ceiling is a government-imposed price control or limit on how high a price is charged for a product.
So, the highest price that can be charged for the widgets is $12. At the low price of $12 suppliers will only provide 12 units of this good,, but at the low price of $12 people will demand 24 units. So there will be a shortage.
AP - Answer - One point is earned for stating that imposing a price ceiling at $12 will create a shortage because quantity demanded is greater than quantity supplied, or because the price ceiling is binding.
(d) If instead the government restricts the market output to 10 units, calculate the deadweight loss.
Understand that a 10 unit restriction on output is represented by a perfectly inelastic supply curve at the 10 unit quantity. All the people/quantity to the right of the 10 unit limit will not be served/produced,, thus it is allocatively inefficient and therefore the efficiency is represented by deadweight loss.
Area of Triangle = b*h/2
height = 40-10 = 30
base = 20-10 = 10
30*10 = 300/2 = 150
AP - Answer - One point is earned for calculating the deadweight loss as $150 and for showing:
(1/2 × 30 × 10)
or
(1/2 × 10 × 10) + (1/2 × 20 × 10)
or
$50 + $100
(e) Assume the price decreases from $20 to $12.
(i) Calculate the PED
(ii) Is demand perfectly elastic, relatively elastic, unit elastic, perfectly inelastic or relatively inelastic?
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