Question

Consider the following Market Demand and Supply Curves.

Qd = 30-P

Qs = P

a.What is the equilibrium quantity and price?

b.What is the Consumer Surplus?

c.What is the Producer Surplus?

d.If the world price is 15, how much will be imported?

Answer 1

a. At equilibrium, demand = supply

So, 30 - P = P

or, 2P = 30

or, P = 30/2 =15

Quantity = 30 -15 = 15

b. Consumer surplus is the difference between the maximum price the consumer is willing to pay and the actual price paid by the consumer. We can derive the maximum price the consumer is willing to pay by calculating the price when quantity demanded = 0.

0 = 30 - P

So, P = 30

30 is the maximum price the consumer is willing to pay and 15 is the actual price paid by the consumer. So, consumer surplus = 30 - 15 = 15.

c. Producer surplus is the difference between the price received the producer and the minimum price the producer is willing to receive. We can derive the minimum price the producer is willing to receive by calculating the price when quantity supplied = 0.

0 = P

0 is the minimum price the producer is willing to receive and 15 is the actual price received by the producer. So, producer surplus = 15 - 0 = 15.  

d. When price is 15, domestic demand = 30 - 15 = 15 and domestic supply is = 15. So, there will be no imports.