Refer to the figure below. The deadweight loss at the market equilibrium quantity is equal to the area ______.
A)½ × EF × AC
B)½ × FG × BD
C)½ × FG × AC
D)½ × GH × BD

Question

Refer to the figure below. The deadweight loss at the market equilibrium quantity is equal to the area ______. 
A)½ × EF × AC 
B)½ × FG × BD 
C)½ × FG × AC 
D)½ × GH × BD

Quizplus · Accepted Answer

The deadweight loss is the area of the triangle formed by the distance between the demand curve and the supply curve at the equilibrium quantity, multiplied by the equilibrium quantity. In this case, the triangle is FGJ.

The base of the triangle, FG, is equal to the distance between the demand and supply curves at the equilibrium quantity (Q*).

The height of the triangle, AJ or AC, is equal to the difference between the equilibrium price (P*) and the socially optimal price (Pc). We can see that AJ and AC are equal because PC is the point where the demand curve intersects the vertical axis (A), so it must be at the same height as the point where the supply curve intersects the vertical axis (C).

Therefore, the area of the deadweight loss triangle is: 
1/2 x base (FG) x height (AC) 
= 1/2 x FG x AC 
= C

Refer to the Figure Below