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.

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. You can assume that demand and supply are continuous between points.

3. 
   

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 TS¹respectively.

1. 
   

2. 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.

3. identify the price wine will sell at (label it asP2 ) and the quantity of wine that will be sold (label it as Q2 ) after the price ceiling.

4. 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 andDWL²respectively.

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

A. Answer

From the demand and supply schedule of  Market for Michigan wine, we can understand that when price is $40. Quantity demanded is 50 units and quantity supplied is 200 units.  Inorder to attain market equilibrium, quantity demanded should be equal to quantity supplied. Equilibrium price is the price corresponsing to quantitty demanded is equal to quantity supplied. At price $40 quantity demanded is less than quantity supplied, which results in excess supply. Thus at $40 market is not in equilibrium. Disequilibrium situation does not last long. When there is excess supply, Unsold coomodity accumulate in the market. Inorder to sell unsold commodities, seller decrease price. As a result demand increases and subsequently market attains equilibirum.

Price	Quantity demanded	Quantity supplied
0	150	0
10	125	50
20	100	100
30	75	150
40	50	200
50	25	250
60	0	300

1.

2.

Total surplus= consumer surplus+ producer surplus

Consumer surplus =   

Value of B = 100

   Value of H =40 (60-20)            B- length of base

                                                              H- Length of height

Consumer surplus =

=2000

Producer surplus =   

Value of B = 100

Value of H = 2

Producer surplus =

=1000

Total surplus= 1000+2000

=3000

Consumer surplus (CS2)=

500+1500

=2000

PRODUCER SURPLUS (PS2)=

=

250

TOTAL SURPLUS (TSL2)=2000+250

=2250

DEAD WEIGHT LOSS(DWL2)=

500+250

=750

With price ceiling consurmer suplus has increased from 2000 to 2250. Thus price ceiling has gained consumers additional 250 surplus to consumers. as a result consumers are better off than before. On contrary producer surplus has decreased from 1000 to 250. Thus producer lost 750 surplus due to price ceiling. Before price ceiling market was at equilibrium by consuming 100 units ar $20 each unit. With price ceiling quantity demanded has increased to 125 and supply has decreased from 100 to 50. Thus there is shortage of wine in the market which may not attract tourist to this place. Thus government shoud interfere to increase supply of wine either by importing wine from foreign countries at $10. Otherwise government should provide subsidy to wine producers so that they will produce more.