2017#2 (Price Ceiling) Paper 3 HL

2017#2 Price Ceiling Paper 3 HL

(a)  Calculate the social surplus at the equilibrium market price.           

Social surplus (total welfare) is the consumer and producer surplus added together.

Area of a Triangle = ½ (base X height)

14 – 2 = 12 (height)

Base = 8  (000 kg)

12 x 8 = 96/2 = 48,000 kg

The Government imposes a Price Ceiling of $5 per kg.

 

(a)  (i) Calculate the resulting shortage in the market.

 

Remember that to be effective or binding

Price (Ceilings are low and Floors are high)

 

The Price ceiling is below the equilibrium point so it is an effective or binding Price ceiling.

At the low price of $5

9,000 kg of Rice will be demanded but at the low price of $5 only 6,000 kg will be supplied. There will be a shortage of 3,000kg.

9 – 6 = 3 (000 kg)

(ii) Calculate the change in consumer surplus after the imposition of the Price Ceiling.

 

The Consumer Surplus before the Price Ceiling

14 – 6 = 8 (height)

Base = 8 (000 kg)

8 x 8 = 64/2 = 32,000 kg  Consumer Surplus Before the Price Ceiling

The Consumer Surplus after the Price Ceiling

The triangle portion = 14 – 8 = 6 (height)

Base = 6

6 x 6 = 36/2 = 18 (000 kg)

 

The Rectangle portion = 8 – 5 = 3 (height)

Length = 6

3 x 6 = 18 (000 kg)

 

Add then together and recognize that the

new area of consumer surplus is 12 + 18 = 36 (000 kg)

 

The Change in consumer surplus was a gain of 4,000kg of Rice.