Question

The demand and supply for a good are respectively QD = 16 – 2P + 2I and QS = 2P – 4 with QD denoting the quantity demanded, QS the quantity supplied, and P the price for the good. Suppose the consumers’ income is I = 2.

i) Determine consumers’ expenditures at the equilibrium. ii) Determine the consumer surplus at the equilibrium. iii) Determine consumers’ total benefits at the equilibrium. iv) Determine producers’ total revenues at the equilibrium.

Answer 1

Quantity demanded = 16 - 2P + 2I

I = 2

So, Quantity demanded = 16 - 2P + 4

= 20 -2P

Quantity supplied = 2P-4

At equilibrium, quantity demnded = quantity supplied

So, 20 - 2P = 2P-4

=> 24 = 4P

=> P=6

=> Q= 8

Consumer Surplus = 1/2 Base Height

= 1/2 8 2

= 8

Consumer's total benefits will be equal to their consumer surplus only as it is the difference between their willingness to pay and amount actually paid.

Producer surplus = 1/2 Base Height

= 1/2 8 4

= 16

Producer revenue = Quantity supplied Price

= 8 6

= 48