Question

1. In an unregulated competitive market, supply and demand have been estimated

as follows: Demand P = 25 – 0.1Q. Supply P = 4 + 0.116Q

1. Calculate annual aggregate consumer surplus.
2. Calculate annual aggregate producer surplus.
3. Define what producer surplus means.

2. The elected officials in a west coast university town are concerned about the excessive rents being charged. The city council is contemplating the imposition of a $350 per month rent ceiling on apartments. An economist estimates the supply and demand curves as: Q_D = 5600 – 8P Q_S = 500 + 4P. The apartments are all identical.

1. Calculate the equilibrium price and quantity that would prevail without the price ceiling. Calculate the producer and consumer surplus at this equilibrium.
2. What quantity will eventually be available if the rent ceiling is imposed? Calculate any gains or losses in CS/or PS.

3. The supply and demand curves for corn are as follows: Q_D = 3,750 – 725P and Q_s = 920 + 690P.

1. Calculate the equilibrium P and Q in the market.
2. If the gov’t imposed a $2.50 price floor how much corn will the government be forced to purchase.
3. Calculate the CS loss due to the price floor.

Answer 1

Demand P = 25 – 0.1Q.

Maximum Pm when Q=0 is 25

Supply P = 4 + 0.116Q

Lowest price(Pl) where Q=0 is 4

Equilibrium:

Demand = supply

25 – 0.1Q.= 4 + 0.116Q

21= 0.216Q

Q*= 97.22

P*= 15.278

a. Annual aggregate consumer surplus= Area below demand curve and above equilibrium price= 1/2(Pm-P*)(Q*)= 1/2(25-15.278)(97.22)= 472.58 square units

b. Annual aggregate producer surplus= Area below P* and above spply curve=  1/2(P*-Pl)(Q*)= 1/2(15.278-4)(97.22)= 548.22 square units

c. Producer surplus means the extra price that producer receives above minimum price it is willing to accept for a particular quantity to supply.

QD = 5600 – 8P

QS = 500 + 4P

a. Equilibrium without price ceiling:

QD=QS

5600-8P=500+4P

5100=12P

P*= 425

Q*= 500+4(425)= 2200