Question

. Consider the following supply and demand system

Supply: Q^S = 60 P^S – 120

Demand: Q^D = 1080 – 40 P^D

For part a) of this question, find the equilibrium price and quantity. Calculate the Consumer Surplus, Producer Surplus, and Total Surplus at the free market equilibrium.

For parts b) through e), consider the government price control described below for each part below. For each part, calculate the equilibrium price and quantity. Calculate the consumer surplus, producer surplus, total surplus, and deadweight loss. Do this for the best-case scenario (highest total surplus/lowest deadweight loss) and the worst-case scenario (lowest total surplus/highest dead weight loss), as indicated in the prompts below.

In some cases, the price control is not binding. In those cases, the outcome will be identical to the free market equilibrium, and you can just reuse your solutions from the free market scenario.

Hint: When calculating DWL, it is often easier to compare the Total Surplus at the constrained equilibrium (under price controls) against the Total Surplus at the free market equilibrium found in part a. The difference between these two is the Dead Weight Loss.

6a) Free Market Equilibrium  

6b) Price floor at 8 – Best Case Scenario

6c) Price floor at 8 – Worst Case Scenario

6d) Price ceiling at 8 – Best Case Scenario

6e) Price ceiling at 8 – Worst Case Scenario

Answer 1