Question

In: Economics

If Demand takes the form P = $40 – 2Q and suppliers price their goods according...

  1. If Demand takes the form P = $40 – 2Q and suppliers price their goods according to the schedule P = 10 + Q, find:
    1. the market price and equilibrium quantity
    2. the producer surplus
    3. Now suppose that the government steps in and institutes a maximum price of $10 on the market. What happens to equilibrium quantity? By how much does total economic surplus decrease?

Solutions

Expert Solution

a) At equilibrium

40 - 2Q = 10 + Q

30 = 3Q

Q = 10 units and

P = 10 + 10 = 20 per unit

b) Producer surplus = 0.5*(price received - reservation price)*qty = 0.5*(20 - 10)*10 = $50

c) A price ceiling of $10 becomes binding as it is less than the market price of $20. Quantity at this price is 0 units because when P is 10, Quantity supplies is Q = P - 10 or 10 - 10 = 0 units. There is no surplus in the market at this price. Hence total surplus declines from 0.5*(40 - 10)*10 = $150 to $0 implying that it declines by $150

Rahul Sunny answered 2 years ago
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