Question #1

Suppose the govt. imposes a price ceiling of $50. Calculate the dead weight loss from price
ceiling. Find a price floor that will result in the same magnitude of deadweight loss.
Dead weight loss
Qd = 700 -2P
Qs = 100 + 4P
Qd = Qs
700 -2P = 100 + 4P
700 100 = 4P + 2P
600 = 6P
600/6 =P
100 = P
Putting P in equation 1, we get
Qd = 700 2P
Qd = 700 2(100)
Qd = 700 200
Qd = 500
Qs = 100 + 4P
Qs = 100 + 4(100)
Qs = 100 + 400
Qs = 500

If price is $50 then Qd and Qs will be

Qd = 700 2P
Qd = 700 2(50)
Qd = 700 100
Qd = 600
Qs = 100 + 4P
Qs = 100 + 4(50)
Qs = 100 + 200
Qs = 300
If price was $100 Qd = 500 and Qs = 500
Govt. imposes price ceiling of $50 then Qd = 600 and Qs = 300
Price of the deadweight loss = 0.5 * (P2 P1) * (Q1 Q2)
= 0.5 * (Price ceiling before ceiling the price) * (Qd after price
ceiling- Qd before price ceiling)
= 0.5 * (50 100) * (500 600)
= 0.5(-50) * (-100)
= 2500
Price floor cause a dead weight loss. A deadweight welfare loss occurs whenever there is a
difference between the price the marginal demander is willing to pay and the equilibrium price.
The deadweight welfare loss is the loss of consumer and producer surplus. Any price below
equilibrium price is price floor.

Question #2
Qd Qs
200 40P = 40 + 40P
200-40 = 40P+40P
160=80P
160/80=p
2=P
Qd = 200-40P
Qd = 200-40(2)
Qd = 200-80
Qd = 120
Qs = 40+40P
Qs = 40+40(2)
Qs = 40+80
Qs = 120
In rest of the world
Qd = Qs
160-40P = 80+40P
160-80=40P+40P
80=80P
80/80=P

1=P
Qd = 160-40P
Qd = 160 40(1)
Qd = 160-40
Qd = 120
Qs = 80+40P
Qs = 80+40(1)
Qs = 80+40
Qs = 120
Before quota the P= 2, Qd = 120 in U.S
Rest of the world P = 1, Qd 120 U.S
If govt. imposes quota of 32 units on import, calculate the deadweight loss from quota
Qd = 120 before quota
But quota is imposed then the new supply = home supply + quota
Qs = 120+32
Qs = 152
Qd = 200 whereas the Qs = 40 in home market, after quota the 32 units are imported.
Deadweight loss from quota = 0.5 * (P2 P1) * (Q1 Q2)
= 0.5*(2-1)* (120-152)
= -16