The market for plywood (a sheet of wood used in construction) 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 price ceiling of $25 results in a shortage because the quantity demanded (Q^D = 800 - 10(25) = 550) exceeds the quantity supplied (Q^S = 50(25) - 1,000 = 250). The deadweight loss is calculated as the area of the triangle formed by the difference in quantities at the equilibrium price and the price ceiling. The equilibrium price is found by setting Q^D = Q^S, which gives P = $30 and Q = 500. The deadweight loss is 0.5 * (500 - 250) * (30 - 25) = $3,750.

The Market for Plywood (A Sheet of Wood Used in Construction)