Question

1. Suppose demand takes the form P = 10 – 2Q and supply takes the form P = 2 + 2Q.
   1. Find the market equilibrium (2)

2. How much total revenue (i.e. P*Q) will the firm receive at this equilibrium? (2)

2. Suppose the government decides to impose a price floor on dairy products to prevent dairy farms from closing down. If the market for a case of milk takes the form of:

Demand: P = 100 – 10Q

Supply: P = 10Q

1. Find the original equilibrium (2)

2. Find the market equilibrium with a price floor of $60 per case. (2)

3. Illustrate this price floor on a graph (2)

Answer 1

Ans. Demand,P = 10 - 2Q and Supply, P = 2 + 2Q

a) At the equilibrium, Demand = Supply

10 - 2Q = 2 + 2Q

10 - 2 = 2Q + 2Q

8 = 4Q

Q = 2 units

and Demand, P = 10 - 2( 2) = $6

Supply, P = 2 + 2(2) = $6

Hence, at the market equilibrium, the equilibrium price is $6 and the equilibrium quantity is 2 units.

b) At the market equilibrium, Total Revenue, TR = PxQ

TR = $6 x 2 = $12

Hence, the market equilibrium,the total revenue is $12.

Ans. Demand for Milk, P = 100 - 10Q and Supply of Milk, P = 10Q

a) At the equilibrium, Demand = supply

100 - 10Q = 10Q

100 = 10Q+ 10Q

100 = 20Q

Q = 5 units

and Demand, P = 100 - 10 (5) = $50

Supply, P = 10 (5) = $50

Hence, at the equilibrium in the milk market, the equilibrium quantity is 5 units and the equilibrium price is $50.

b) At a price floor, P = $60

Demand, P = 100 - 10Q

60 = 100 - 10Q

10Q = 100 - 60

10Q = 40

Q = 4 units

Supply, P = 10Q

P = 10Q

60 = 10 Q

Q = 6 units

At a price floor, P =$60, Supply > Demand then there is a surplus of milk in the market.

Surplus = Supply - Demand

= 6 units - 4 units

= 2 units.

Hence, At P = $60, only 4 units demanded with surplus of supply of mlik of 2 units.

c)