Question

1. Please consider the following market: Demand by P = 19 - 2Q Supply by P = 5Q a. Please solve the equilibrium Quantity and Price. and calculate the CS (consumer’s surplus), PS (producer’s surplus), DWL (if there is any), and ES (Economics surplus) b. Suppose we now place a tax of $5 per unit of output on the seller.

a. What would the new supply curve is?

b. Please solve the new equilibrium quantity and price.

2. If the demand curve of a market is P = 14 - Q and the supply curve is P = 2 + 2Q, but a price ceiling of 6 is imposed:

a. Would there be a surplus or shortage? If yes, how much?

b. Please calculate PS, CS, DWL and ES

Answer 1

1) Consumer Surplus [CS]= Price that they are willing to pay- the price that they actually pay

Diagrammatically, it is the area between the equilibrium price and the demand curve.

2) Producer Surplus [PS]= Price that a firm receives - price willing to sell it at.

Diagrammatically, it is the difference between the supply curve and the equilibrium price.

3) Economic Surplus= Consumer Surplus + Producer Surplus.

4) Deadweight loss is the cost created to the society when demand and supply are not in equilibrium, which is caused by the inefficient allocation of resources.

5) Price ceiling is a situation when the price charged is more or less than the equilibrium price. It is imposed by the government or a group to control the maximum prices charged by the suppliers. The price below is equilibrium is effective in comparison to above the equilibrium.