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Figure: Price Ceilings and Consumer Valuation
-(Figure: Price Ceilings and Consumer Valuation) Refer to the figure. Suppose a price ceiling of $3 goes into effect. What is the loss of consumer surplus due to the random allocation of price-controlled goods compared to the allocation only to the highest-value users?
A) $90
B) $60
C) $150
D) $30

Question

Use the following to answer questions:
Figure: Price Ceilings and Consumer Valuation 
-(Figure: Price Ceilings and Consumer Valuation) Refer to the figure. Suppose a price ceiling of $3 goes into effect. What is the loss of consumer surplus due to the random allocation of price-controlled goods compared to the allocation only to the highest-value users?
A) $90 
B) $60 
C) $150 
D) $30

Quizplus · Accepted Answer

The loss of consumer surplus due to random price allocation is the shaded triangle in the figure, which has a height of $6 ($9 - $3) and a base of 10 units. Therefore, the loss is equal to (1/2) x 6 x 10 = $30. However, if the price-controlled goods were allocated only to the highest-value users, the consumer surplus would have been reduced by the shaded rectangle, which has a height of $6 and a base of 5 units. Therefore, the loss in consumer surplus due to the price ceiling is equal to (1/2) x 6 x 5 = $15 per unit. Since there are 4 units traded in the market, the total loss is 4 x $15 = $60.

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