Question

1. Suppose the market supply for Good X is given by Q_X^S = -100 + 5P_X. Compute and illustrate with completely labelled diagram the producer surplus if the equilibrium price of X is $100 per unit (show the relevant calculation).

2. The daily market demand and supply for chicken in Kuala Lumpur is given by:

Qd= 16,000 – 1,000P

Qs=   2,000 + 1,000P

The quantity and price are measured in tonnes and RM, respectively.

1. Determine the equilibrium quantity and price in the above market,
2. Explain what will happen if the government imposes a price ceiling of RM10 on the chicken.

Answer 1

a. QX^s= -100+5P_X

WHEN Qs is zero

0=-100+5px

100=5px

Px=20 , thus the vertical intercept is 20.

When Px is zero

Qx=-100+0

is horizontal intercept is -100.

When price is 100, Qs = -100+5*100 =400

Producer suplus is represented by area below price line and above supply curve, ie ABC in the figure.

Producer surplus=

Base =400

height = 100-20=80

producer surplus=

=16000

a. equilibrium price and quantity of chicken in Kuala Lumpur market is determined by equating demand and supply curve.

16,000 – 1,000P =2,000 + 1,000P

14000=2000P

P=7, equilibrium price is RM 7

Equilibrium quantity = 2,000 + 1,000*7

=9000

Price ceiling is imposed by government to control market price of goods. It is usually set below market determined price. Price ceiling is imposed avoid seller charging higher price from buyers. When price ceiling is set above equilibrium price, as in the case above. Here equilibrium price is 7 and quantity is 9000. when price ceiling is imposed price is 10. With price ceiling price RM 10, quantity supplied is PQ1 and quantity demanded is PQ0. thus the quantity supplied is greater than quantity demanded. The excess supply equals Q0Q1. thus when price ceiling above equilibrium , consumer surplus decreases and producer surplus increases

.