Question
In: Economics
Let the following be the supply and demand for coconuts. P 2 3 4 5 6...
Let the following be the supply and demand for coconuts.
P 2 3 4 5 6 7 8 9 10 11 12
Qs 100 200 300 400 500 600 700 800 900 1000 1100
QD 550 500 450 400 350 300 250 200 150 100 50
Now imagine that there is a price ceiling on coconuts at $3
but in order to prevent wasting peoples' time by making them wait
in line, the government hands out ration coupons to people. In
order to buy a coconut you need a coupon. Assume that the number of
coupons is the appropriate number to clear the market with the
price ceiling (you should know what that is). Now notice that the
government probably doesn't know who has the highest marginal value
for coconuts so, while this will eliminate the waste from the line
it will most likely not allocate the coconuts efficiently. However,
we can solve this problem by allowing people to trade the coupons!
So imagine that there is such a market and it is perfectly
competitive.
a. What will the price of a coupon be in this market?
b. Draw the price ceiling graph and identify the consumer and
producer surplus, and the dead weight loss. There should be an area
in there which would have been the cost of the line had there been
a line. Label this area "A." Who gets this surplus now?
Solutions
Expert Solution
As per the given information, demand = supply for price $5. At
this price, the QD = QS = 400.
Now as government imposes price ceiling, the price will drop to the
ceiling if it is below equilibrium. Ceiling is $3. Equilibrium
price is $5. Hence price will decrease to $3. This can be shown as
follows:
Here the equilibrium quantity is 400 units and price is $5. The
green line shows the price ceiling. Hence price will drop to $3.
From the table we can see, at this price, QD = 500 and Qs =
200.
Hence there arises a shortage of supply by 300 units.
a) To avoid crowd, government decides to distribute coupon. The price of coupon will be $3, equal to the ceiling.
b) The required areas are as follows :
The yellow area is the consumer surplus after price ceiling.
(increases)
Gray area is producer surplus after ceiling. (decreases)
Red area is deadweight loss.
Since the price has decreased due to ceiling, this area goes to the
consumer in terms of increase in consumer surplus. (marked pink and
A)
Rahul Sunny answered 1 year agoRelated Solutions
Let the following be the supply and demand for coconuts. P 2 3
Let the following be the supply and demand for coconuts.
P
2
3
4
5 6
7
8
9
10
11
12
Qs 100
200 300
400
500 600 700
800 900
1000 1100
QD 550
500 450
400
350 300 250
200 150
100 50
Now...
1. Here is the demand for coconuts: P 3 4 5 
1. Here is the demand for coconuts:
P
3
4
5
6
7
8
9
10
11
12
13
QD
1100
1000
900 800
700 600
500
400
300
200 100
And here is supply
P
3
4
5
6
7
8
9
10 11
12 13
QS
100
200
300
400
500
600
700
800
900
1000 1100
Identify the equilibrium price, quantity, consumer and producer
surplus and...
1. Here is the demand for coconuts: P 3 4 5 &n
1. Here is the demand for coconuts:
P
3 4
5 6 7 8 9 10 11
12 13
QD
1100
1000
900 800
700 600
500
400
300
200 100
And here is supply
P
3
4
5
6
7
8
9 10
11
12
13
QS
100
200
300
400
500
600
700
800
900
1000 1100
Identify the equilibrium price, quantity, consumer and producer
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