Question

Question 2. Consider the market for burritos in Vancouver, blessed with thousands of students and dozens of small burritos stands. The demand and supply schedules are shown in the table.

Price ($)	Quantity Demanded (Burritos)	Quantity Supplied (Burritos)
0.0	500	125
1.0	400	175
1.50	350	200
2.00	300	225
2.50	250	250
3.00	200	275
3.50	150	300
4.00	100	325
5.00	0	375

1. Graph the demand and supply curves. What is the free -market equilibrium in this market?

Answer:

2. What is the total economic surplus in this market in the free-market equilibrium? What area in your diagram represents this economic surplus?

Answer:

3. Suppose the local government, out of concern for the students' welfare, enforces a price ceiling on burritos at the price of $1.50. Show in your diagram the effect on price and quantity exchanged.

Answer:

4. Are students better off as a result of this policy? Explain.

Answer:

5. What happens to overall economic surplus in this marker as a result of the price ceiling? Show this in the diagram.

Answer:

Answer 1

Solution:

a)

Graph is shown below. Free market equilibrium has a price of $2.5 per unit and a quantity of 250 burritos.

b)

Total economic surplus in this market in the free-market equilibrium is shown above. It is equal to the area between the demand and supply curves. It is equal to 0.5*(5-2.5)*250 + 0.5*(250 + 125)*2.5 = 781.25

c)

The effect of a price ceiling on burritos at the price of $1.50 is shown below. This has created a shortage of (350 - 200) = 150 burritos.

d)

Consumer surplus is now 0.5*(5-1.5 + 3 - 1.5)*200 = 500. Since CS is reduced so the students are worse off as a result of this policy.

e)

There is a decline in the overall economic surplus in this marker as a result of the price ceiling. The reduction in total surplus is shown as deadweight loss.

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