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Consider a perfectly competitive market in the short-run with the following demand and supply curves, where...

  1. Consider a perfectly competitive market in the short-run with the following demand and supply curves, where P is in dollars per unit and Q is units per year:

Demand: P = 500 – 0.8Q

Supply: P = 1.2Q

  1. Calculate the short-run competitive market equilibrium price and quantity. Graph demand, supply, and indicate the equilibrium price and quantity on the graph.

  1. Now suppose that the government imposes a price ceiling and sets the price at P = 180. Address each of the following questions:
  • Draw the price ceiling line on your graph above.  
  • At P = 180, what is the excess demand (quantity demanded minus the quantity supplied)? Label the quantity demand and quantity supplied at P = 180 on your graph above.
  • What is the deadweight loss (DWL) to consumers from the price ceiling? Show your calculations and label or shade the area of DWL in your graph above.
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