Question

Suppose that the demand for cars in Australia is given by Q= 400 – 0.4P, and the supply is given by Q= 0.4P.

A. Illustrate the market equilibrium on a graph. (Calculate and clearly label the equilibrium price and quantity.)

B. Calculate the consumer surplus, producer surplus and total economic surplus of the market when it is in equilibrium.

C. The Australian Government, wanting to protect consumers, imposes a price ceiling of $125. Using your graph, show and explain how this this intervention will affect the quantity supplied and demanded in this market.

D. Illustrate on your graph the consumer surplus and the deadweight loss in this market with the price ceiling. Overall, has the policy made consumers better or worse off? Are all consumers better off? Explain your answer. (You can draw the graph, take a picture and attach it here. Please do *not* take a picture of your hand-written answer, it is much easier for your marker to read typed text)

Answer 1

A. Q = 400 - 0.4 P

Q = 0.4 P

At equilbrium, Quantity demanded = Quantity supplied

400 - 0.4 P =  0.4 P

=> 0.8 P = 400

=> p = 400 / 0.8 = 500

Equlbrium price = $ 500

Equlbrium Quantity = 0.4 * 500 = 200

B. consumer surplus = area of trainagle ABC

= 1/2 * (1000 - 500) * 200

= $ 5000

Producer surplus = area of rectangle BCFG

= 200 * 500 = $100000

Total ecponomic surplus = consumer + producer surplus

= 5000 + 100000 =$105000

C. At price = Quantity supplied will be 50 units

and Quantity demanded will be 350 units.

D. After price ceiling, Consumer surplus = 1/2 * (1000 - 875 ) * 50 + (875 - 125) *50

= 3125 + 37500 =$40625

Sice consumer surplus has incraesed from 5000 to 40625 and the price at which product is sold reduced to 125 which makes better deal for consumer. It implies that consumer are better off.