Question

Consider the following supply and demand equations:

Supply: p = 10 + q

Demand: p = 100 − 2q

Show your work as your respond to the following questions.1

(a) What is the market equilibrium price and quantity? (5%)

(b) What is the Total Surplus at equilibrium? (5%)

(c) The government enacts a price ceiling at ¯p = 50. What is the Total Surplus?

D）Calculate the Consumer Surplus under a price ceiling of ¯p = 20.

(e) What is the Deadweight Loss under a price ceiling of ¯p = 10?

Answer 1

a) Market equilibrium Price =40

Market equilibrium quantity = 30

(solved through demand and supply function as shown in the uploaded picture)

b) Total Surplus is the sum total of Consumer surplus and Producer Surplus. At market equilibrium, Consumer surplus is the area above equilibrium price and below the demand curve i. e area B as shown in the diagram. Similarly, producer surplus is the area above the supply curve and below the equilibrium Price i.e. Area A as marked in the diagram.

Hence, Total surplus = AREA (A + B)

c) When price ceiling is set at p=50, by the same logic as above, total surplus = AREA (A+B+C).

​D) Consumer surplus shown in the diagram as area written as CS.

e) Dead Weight Loss as shown in the diagram as area written DWL.