Question

1. Table 1 below shows the schedule of demand and supply in the Market for Michigan wine. Use this table to answer the following questions.

Table 1 - Demand & Supply in the Market for Michigan Wine

Market Price (P )	Quantity Demanded (Qd )	Quantity Supplied (Qs )
$0	150	0
$10	125	50
$20	100	100
$30	75	150
$40	50	200
$50	25	250
$60	0	300

1. Explain why a price of $40 cannot be an equilibrium price in this market.
2. Draw a figure (call it Figure 1) representing the Market for Michigan wine (i.e. demand and supply curves). Be sure to fully label the graph (axes, titles, curves, etc.). You can assume that demand and supply are continuous between points.
   1. On Figure 1, identify the market equilibrium price of Michigan wine (label it as Pe ) and the market equilibrium quantity of wine sold (label it as Qe ).
   2. Calculate the value of Consumer Surplus (CS), Producer Surplus (PS) and Total Surplus (TS) in the market for Michigan wine (these should be dollar values). Indicate the areas on Figure 1 that represent these and label them CS¹, PS¹ and TS¹ respectively.
3. Suppose the Michigan state government decides that they want to attract more tourists to the state and that currently the price of wine is too high. So, they impose a price ceiling of $10 in the market for Michigan wine to make it cheaper for everyone. Draw a new and separate figure (call it Figure 2) representing the Market for Michigan wine.
   1. On Figure 2, identify the price wine will sell at (label it as P2 ) and the quantity of wine that will be sold (label it as Q2 ) after the price ceiling.
   2. Calculate the value of Consumer Surplus, Producer Surplus and Total Surplus and any Deadweight Loss (DWL) there may be. Indicate the areas on Figure 2 that represent these and label them CS², PS² and TS² and DWL²respectively.

4. Use your results from parts (B) and (C) to determine whether consumers and producers are made worse off, better off or the same under the price ceiling. Does this policy help consumers overall as it was intended? Are any individual consumers made worse off or better off? Is this a successful policy to attract more tourists to Michigan? How might producers respond in ways that the state government might not have foreseen?

Answer 1

1. $40 cannot be the equilibrum price in this market because when price = $40, quantity demanded will be 50 units and supplied will be 200 units. Supply will be more than demand, so there will be surplus of wine in the market and no one to demand it.

2. The graph:

  

(i) Equilibrium price of wine (Pe) = $20. Equilibrium quantity (Qe) = 100 units.

(ii) Consumer surplus(CS1) = ½*(60-20)*100 =2000 CS1 = $2,000

Producer surplus (PS1) = ½*20*100 = 1000 PS1 = $1,000

Total surplus = CS1 + PS1 = 2,000+1,000 = 3,000 TS1 = $3,000

C. The graph when price ceiling is imposed by the government:

  

(i) Pice (P2) = $10; Quantity sold (Q2) = 50 units

(ii) CS2 = (½*(60-40)*50) + ((40-10)*50) = 500+1500 = $2000 CS2 = $2,000

PS2 = ½*10*50 = $250 PS2 = $250

TS2 = CS2 + PS2 = 2000+250 = 2250 TS2 = $2,250

DWL = ½*30*50 = 750 DWL = $750

D. In the market, there is more demand than supply. There is shortage. With 50 units available, price is $40. So the government is not actually successful in imposing price ceiling.

Ovrall consumer surplus is the same ($2,000). But, individually, consumers are made worse off. They can buy only 50 units comapred to 100 at equilibrium. So, that contributes to DWL in the market.

Producers are made worse off because they sell less quantity now. Producer surplus reduces from $1,000 to $250.

Price ceiling does not actually help consumers. Those consumers whose willingness to pay is between $10 and $40 are uanble to buy wine now because only those consumers who have willingness to pay is $40 and above can buy wine due to artificial scarcity resuting from market inefficiency.

Producers will protest against price ceiling. Those producers who are willing to supply for $10 - $20 will be hit directly. They will not produce. So, the produres and consumers who lost due to price ceiling form DWL. It represents the lost surplus. It is the area of the triangle to the right of CS2.