6.3 Controlling Prices-Maximum and Minimum Prices

Figure 6.6
-Refer to Figure 6.6.If the government will not allow landlords to charge more than $400 for an apartment,the deadweight loss will be equal to

Question

6.3 Controlling Prices-Maximum and Minimum Prices
  
Figure 6.6
-Refer to Figure 6.6.If the government will not allow landlords to charge more than $400 for an apartment,the deadweight loss will be equal to

Quizplus · Accepted Answer

The deadweight loss caused by a price ceiling is the area between the supply and demand curves, up to the quantity where the ceiling is set. In this case, the quantity where the ceiling is set is 5,000 apartments (where the demand curve intersects with the ceiling). The difference between the price the market would have supported (in absence of the ceiling) and the ceiling price is $100 (the distance between the demand curve and the ceiling at the quantity where they intersect). Therefore, the deadweight loss is equal to the area of the triangle with base 5,000 and height $100, which is (1/2)*(5,000)*($100) = $250,000. Since deadweight loss represents a loss of efficiency in the market, the best choice in this case would be to remove the price ceiling, which would result in a more efficient allocation of apartments.