Question

Suppose demand and supply are given by Q^d = 50 - P and Q^s  = 1.0P - 20.

a. What are the equilibrium quantity and price in this market?

Equilibrium quantity: ______________

Equilibrium price: $ ___________________

b. Determine the quantity demanded, the quantity supplied, and the magnitude of the surplus if a price floor of $44 is imposed in this market.

Quantity demanded: ______________

Quantity supplied: ______________

Surplus: ________________

c. Determine the quantity demanded, the quantity supplied, and the magnitude of the shortage if a price ceiling of $28 is imposed in the market. Also, determine the full economic price paid by consumers.

Quantity demanded: ____________

Quantity supplied: _______________

Shortage: ______________

Full economic price: $ _____________________

Answer 1

A). Equilibrium is a state where demand and supply both are equal to each other.

So, Qd = Qs

50 - P = 1.0P - 20

70 = 2P

P =35

Q = 50 - P

Q = 50 - 35 = 15

Equilibrium Quantity = 15 and Equilibrium Price = 35

B).  Price floor is the minimum price which should be charged for the product. To be effective, it has to be more than equilibrium price. According to the question, the price floor of $44 has been imposed on the product.

Quantity demanded = 50 - P = 50 - 44 = 6

Quantity supplied = 1.0P - 20 = 44 - 20 = 24

As price floor is more than equilibrium price, quantity supplied is more than quantity demanded and the difference between both of them is known as surplus.

Surplus = Quantity supplied - Quantity demanded = 24 - 6 =18

C). A price ceiling is a maximum price which can be charged for the product. To be effective it is always lower than the equilibrium price. According to the question, the price ceiling of $28 is imposed in the market.

Quantity demanded = 50 - P = 50 - 28 = 22

Quantity supplied = 1.0P - 20 = 28 - 20 = 8

As price ceiling is less than equilibrium price, quantity demanded is more than quantity supplied and the difference between both of them is known as shortage

Shortage = Quantity demanded - Quantity supplied = 22 - 8 = 14

At quantity 8, consumers are willing to pay is 8 = 50 - P, which is P = 42

Full economic price = Price ceiling + Non pecuniary Price = 28 + (42-28) = 28+14 = 42

Full economic price = 42