The market for plywood is characterized by the following demand and supply equations: Q^D = 800 - 10P and Q^S = 50P - 1,000, where P is the price per sheet of plywood and Q measures the quantity of plywood. What is the size of the deadweight loss if the government imposes a price ceiling of $25 per sheet of plywood?

Question

Quizplus · Accepted Answer

The equilibrium price is found by setting Q^D = Q^S. Solving 800 - 10P = 50P - 1,000 gives P = $30. At P = $25, Q^D = 550 and Q^S = 250, creating a shortage of 300 units. The deadweight loss is calculated using the formula for the area of a triangle: 0.5 * (shortage) * (equilibrium price - price ceiling) = 0.5 * 300 * (30 - 25) = $3,750.

The Market for Plywood Is Characterized by the Following Demand