Figure 9.1.3
-Refer to Figure 9.1.3 above. If the government establishes a price ceiling of $1.00, the resulting deadweight loss will be:
A) $1.50.
B) $200.
C) $150.
D) $300.
E) $600.

Question

Figure 9.1.3
-Refer to Figure 9.1.3 above. If the government establishes a price ceiling of $1.00, the resulting deadweight loss will be:
A) $1.50. 
B) $200. 
C) $150. 
D) $300. 
E) $600.

Quizplus · Accepted Answer

The deadweight loss is the loss of consumer and producer surplus in a market due to inefficiencies caused by a government intervention such as a price ceiling. In this case, the price ceiling is set below the equilibrium price, causing a shortage of the product. The area of deadweight loss is the triangle formed by the points where the demand curve intersects the supply curve (the equilibrium point) and where the price ceiling intersects the demand curve (the quantity demanded at the price ceiling). 
In this scenario, the equilibrium price is $2.50 and the quantity exchanged is 4 units. At a price ceiling of $1.00, the quantity demanded is 1 unit and the quantity supplied is 3 units, resulting in a shortage of 2 units. The deadweight loss is the area of the triangle with base 2 (the difference in quantity exchanged between the equilibrium and price ceiling) and height $1.50 (the difference in price between the equilibrium and price ceiling). Therefore, the deadweight loss is (1/2) x 2 x $1.50 = $1.50. Thus, the correct answer is C.

Figure 9.1.3 -Refer to Figure 9.1.3 Above. If the Government Establishes a Establishes