Without restrictions,the market supply curve is horizontal at P = 5,and the inverse demand curve for taxi cab rides is P = 20 - Q in a competitive market.Subsequently,only 10 taxi cabs are allowed in the market.This results in a deadweight loss of
A) 0.
B) 5.5.
C) 12.5.
D) 25.

Question

Quizplus · Accepted Answer

Without restrictions, the market equilibrium would occur where the supply curve intersects with the demand curve:
P = 20 - Q = 5
Q = 15, P = 5
When only 10 taxi cabs are allowed in the market, the new market equilibrium occurs where the supply curve intersects with the restricted demand curve (which is the original demand curve shifted to the left by 10 units of quantity):
P = 20 - (Q+10) = 5
Q = 5, P = 15
The deadweight loss is the area of the triangle between the two equilibrium points and the demand curve:
DWL = 0.5*(15-5)*(20-15) = 12.5
Therefore, the best choice is C, which is the closest to the calculated deadweight loss.

Without Restrictions,the Market Supply Curve Is Horizontal at P =