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CHAPTER 14 - ECONOMIC EFFICIENCY
AND THE COMPETITIVE IDEAL
ANSWERS TO EVEN-NUMBERED PROBLEMS
2. The dollar value of the deadweight loss = the triangular area below the demand curve,
above the supply curve and to the right of areas G and F = ((($21 - $19) x 1000)/2) +
((($19 - $17) x 1000)/2) = $1000 + $1000 = $2000.
4.
a. Market consumer surplus = (($1.40 - $1.20) x 2000) + ((($1.50 - $1.40) x 2000)/2) =
$400 + $100 = $500.
b. Market producer surplus = (($1.20 - $1.10) x 2000)/2 = $100.
c. Total net benefits in market = market consumer surplus + market producer surplus =
$500 + $100 = $600.
d. Deadweight loss = The total net benefits in the market at equilibrium – total net
benefits in market = $800 (from problem 4 (c)) - $600 = $200.
6.
The deadweight loss caused by monopolization is the area of the triangle illustrated in
panel (b) of Figure 9. Recall that the area of a triangle = 0.5 x (base x height). Now
think about rotating this triangle by 90 degrees. In that case, the base is $5 - $2 = $3, and
the height is 500,000 – 300,000 = 200,000. Thus, deadweight loss = 0.5 x $3 x 200,000 =
$300,000.
8. a. If supply is completely price inelastic between $3 and $5 there is no deadweight loss. There
is, however, a transfer from producer surplus, to consumer surplus. Looking at the graph
before the price ceiling, where A is the equilibrium point, you can see that the original
consumer surplus was the triangle below the demand curve and above the $5 line. The
original producer surplus was the trapezoid area above the supply curve and below the $5
line.
Price
S
A
$5
B
$3
D
Q
Quantity
Once we introduce the $3 ceiling, the new equilibrium point is B. Notice that the
equilibrium quantity stays the same, only the equilibrium price changes (we get this
outcome because supply is the short side, and it is perfectly inelastic). The new consumer
surplus is the trapezoid below the demand curve and above the $3 line. The new producer
surplus is the triangle above the supply curve and below the $3 line.
In this case, because supply is perfectly inelastic in the range $3-$5, the price ceiling hurts
the suppliers and benefits the consumers without wasting any resources, since the
consumers’ gain is exactly equal to suppliers’ loss.
b. Yes, there is deadweight loss. Before the price ceiling, the market was in equilibrium at
point A. As usual, consumer surplus was the triangle below the demand curve and above
the $5 line and producer surplus was the triangle above the supply curve and below the $5
line.
Price
S
$5
A
$3
B
D
QB
QA
Quantity
After the $3 ceiling is introduced, the market moves to the equilibrium at point B, at which
quantity bought and sold is smaller than at A. The new consumer surplus is the trapezoid
area below the demand curve, above the $3 line and to the left of QB (the new equilibrium
quantity). The new producer surplus is the triangle above the supply curve and below the
$3 line. The deadweight loss is the triangle to the left of quantity QB, above the supply
curve and below the demand curve.
In this case, supply is again the short side, which determines the new equilibrium quantity
QB. However, because supply is no longer perfectly inelastic in the range $3-$5, we
observe a deadweight loss. Since demand is not on the short side, having it perfect inelastic
in the rage $3-$5 makes no difference for the equilibrium outcome.
10.
a. The annual deadweight loss is: ½ X $150 X 4 = $300.
b. Annual government revenue is $150 X 18 = $2,700.
c. Deadweight loss per dollar of government revenue is: $300/$2700 = $0.11
MORE CHALLENGING
12.
At the ceiling price of $15 per ticket, there are 2,000 tickets available, so that is how many
the scalpers would buy up. “The highest single price that the market will bear” is
determined by reading up to the market demand curve at a quantity of 2,000. It is $23 per
ticket.
Consumer
Surplus
Price
deadweight
loss
$23
$19
S
Ticket
Scalpers’
Revenue
$15
D
Producer
Surplus
2,000
4,000
6,000 Number of
Tickets
per Week
a. Consumer surplus is the area beneath the demand curve, but above the market price
of $23 per ticket, up to the market quantity of 2,000.
b. Producer surplus is the area above the supply curve, but below the price at which the
tickets were sold (the ceiling price of $15 per ticket), up to the market quantity of
2,000.
c. Ticket scalpers’ revenue is the difference between their purchase price ($15 per
ticket) and their selling price ($23) multiplied by the number of tickets sold on the
black market (2,000). It is the rectangular area identified in the diagram.
d. Deadweight loss is the triangular area between the supply and demand curves, and
between 2,000 and 4,000 tickets per week.