Question

A market is described by the following supply-and-demand curves:

QS = 2P

QD = 300−P

The equilibrium price is_______and the equilibrium quantity is________.

Suppose the government imposes a price ceiling of $90. This price ceiling is [binding/not binding], and the market price will be______. The quantity supplied will be ______ , and the quantity demanded will be_______. Therefore, a price ceiling of $90 will result in [a shortage/ a surplus/ neither a shortage nor surplus].

Suppose the government imposes a price floor of $90. This price floor is [not binding/binding]   , and the market price will be________. The quantity supplied will be______and the quantity demanded will be_______. Therefore, a price floor of $90 will result in [a shortage/ a surplus/ neither a shortage nor surplus].​

Instead of a price control, the government levies a tax on producers of $30. As a result, the new supply curve is:

QS = 2(P−30)

With this tax, the market price will be _________, the quantity supplied will be _______, and the quantity demanded will be _________.  The passage of such tax will result in [a shortage/ a surplus/ neither a shortage nor surplus].

Answer 1

Given, QS = 2P and QD = 300−P, the equilibrium is attained at a point where QS = QD. Thus, 2P = 300 - P or P = 100 and Q = 200.

The equilibrium price is $100 and the equilibrium quantity is 200 units.

Suppose the government imposes a price ceiling of $90. This price ceiling is binding, and the market price will be $90. The quantity supplied will be 180 units, and the quantity demanded will be 210 units. Therefore, a price ceiling of $90 will result in a shortage in the economy.

Suppose the government imposes a price floor of $90. This price floor is not binding, and the market price will be $100. The quantity supplied will be 200 units and the quantity demanded will be 200 units. Therefore, a price floor of $90 will result in neither a shortage nor surplus.

Instead of a price control, the government levies a tax on producers of $30. As a result, the new supply curve is:

QS = 2(P−30)

New equilibrium: 2P - 60 = 300 - P. thus, P = 120 and Q = 180.

With this tax, the market price will be 120$ , the quantity supplied will be 180, and the quantity demanded will be 180 units. The passage of such tax will result in neither a shortage nor surplus.