📚 Learning Guide
Calculating Deadweight Loss
easy

Which of the following scenarios best illustrates the concept of deadweight loss in a market affected by a price ceiling?

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Choose the Best Answer

A

A government-imposed price ceiling on rental apartments leads to a shortage, resulting in fewer apartments being rented than would occur at equilibrium.

B

A decrease in consumer income causes a leftward shift in the demand curve, leading to an increase in the equilibrium price and quantity.

C

A subsidy on corn production increases the supply, leading to a surplus that drives prices down.

D

A tax on luxury goods raises the price consumers pay, decreasing the quantity sold without affecting the overall market equilibrium.

Understanding the Answer

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Answer

Deadweight loss happens when a market is not working efficiently, often due to government interventions like price ceilings. A price ceiling is a maximum price set by the government, usually to help consumers by keeping prices low. For example, if the government sets a price ceiling on rent, landlords might not want to rent out their apartments at the lower price, leading to fewer apartments available. This creates a situation where some people who want to rent cannot find an apartment, while others who could afford more are unable to pay the lower price. The lost opportunities for both landlords and renters create a deadweight loss, meaning the total economic benefit in the market is reduced.

Detailed Explanation

A price ceiling makes it illegal to charge more than a set price. Other options are incorrect because This option confuses income changes with price ceilings; This scenario talks about a subsidy, which is different from a price ceiling.

Key Concepts

Deadweight Loss
Market Equilibrium
Price Controls
Topic

Calculating Deadweight Loss

Difficulty

easy level question

Cognitive Level

understand

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