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Figure: Price Ceilings and Consumer Surplus
-(Figure: Price Ceilings and Consumer Surplus) Refer to the figure. There is a price ceiling of $20. What is the value of consumer surplus if all the goods are allocated randomly?
A) $120
B) $180
C) $80
D) None of the answers are correct.

Question

Use the following to answer questions:
Figure: Price Ceilings and Consumer Surplus 
-(Figure: Price Ceilings and Consumer Surplus) Refer to the figure. There is a price ceiling of $20. What is the value of consumer surplus if all the goods are allocated randomly?
A) $120 
B) $180 
C) $80 
D) None of the answers are correct.

Quizplus · Accepted Answer

To find the consumer surplus, we need to first find the equilibrium quantity and price. However, since there is a price ceiling of $20, the equilibrium price becomes irrelevant. The figure shows that at the price ceiling of $20, the quantity supplied would be 60 and the quantity demanded would be 180. The consumer surplus is the area between the demand curve and the price ceiling, up to the quantity demanded. This area is a triangle with a base of 60 (quantity demanded) and a height of $20 - $10 = $10 (the difference between the price ceiling and the original equilibrium price). The area of the triangle is (1/2) x base x height = (1/2) x 60 x 10 = $300/2 = $150. However, since the goods are allocated randomly, only half of the total consumer surplus is realized. Therefore, the correct answer is $150/2 = $75, which is closest to option A).

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