Suppose the market demand for a commodity is given by the download sloping linear demand function:...

Suppose the market demand for a commodity is given by the download sloping linear demand function:

P(Q) = 3000 - 6Q

where P is a price and Q is quantity. Furthermore, suppose the market supply curve is given by the equation:

P(Q) = 4Q

a) Calculate the equilibrium price, quantity, consumer surplus and producer surplus.

b) Given the equilibrium price calculated above (say's P*), suppose the government imposes a price floor given by P' > P*. Pick any such P' and compute the resulting consumer surplus, producer surplus and resulting dead-weight loss. (For example, if you calculated P* = 100 then pick any P' > 100 such as P' = 120 and compute the resulting consumer surplus, producer surplus and dead-weight loss.)

C) now, suppose instead, the government imposes a price ceiling given by P" < P*. Pick any such P" and compute the resulting consumer surplus, producer surplus and resulting dead-weight loss.

Expert Solution

Consumer surplus is the area below demand curve and above market price. On the other hand, producer surplus is the area below market equilibrium price and above supply curve.

Rahul Sunny answered 1 year ago

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