Question

1. The supply and demand for saffron (a spice) are described by the following equations: Supply: ??=6?−12 Demand: ??=252−2? Q is in ounces, and P is in dollars per ounce. Three candidates are running for office that have radically different policies for the saffron market. Answer the following questions about their policy proposals.

a) For a benchmark, graph the supply curve and the demand curves. What are the equilibrium price and quantity if the market is free to function on it’s own?

b) On your graph from part a), show the consumer surplus (CS) and producer surplus (PS). Calculate the CS, PS, and total surplus (TS) at the equilibrium (give numerical values for each). Hint: because CS and PS are right triangles, then their numerical values are their areas. Does the market maximize welfare? Support your answer with no more than two sentences.

Answer 1

a.

Equilibrium is the equality of demand and supply.

Demand = Supply

Qd = Qs

252 – 2P = 6P – 12

8P = 252 + 12

8P = 264

P = 264/8 = 33

By putting this value in Qd or QS,

Qd = 252 – 2P

      = 252 – 2 × 33

      = 252 – 66

      = 186

Regarding the demand graph:

Qd = 252 – 2P

If (Qd = 0); 0 = 252 – 2P, 252 = 2P, P = 252/2 = 126; therefore, the coordinates (Q, P) are (0, 126)

If (P = 0); Qd = 252; therefore, the coordinates (Q, P) are (252, 0)

The equilibrium (Q, P) are (186, 33)

These coordinates are pointed in the graph to get the demand curve.

Regarding the supply graph:

Qs = 6P – 12

If (Qs = 0); 0 = 6P – 12, 6P = 12, P = 12/6 = 2; therefore, the coordinates (Q, P) are (0, 2)

The equilibrium (Q, P) are (186, 33)

These coordinates are pointed in the graph to get the supply curve.