The market for coffee beans is described by the following equations: Qs = 2P – 8 Qd = 16 – P

The market for coffee beans is described by the following equations:

Qs = 2P – 8

Qd = 16 – P

a) Suppose the government sets a price ceiling at $10. Is there a shortage? Is there a surplus?

b) The government lowers the price ceiling to $5. Describe the changes in shortage/surplus.

c) Now suppose a price floor/ceiling has been instituted, which causes a surplus of 9 units. Is this a floor or a ceiling? What specific price would create this surplus?

Expert Solution

a) No shortage, no surplus - The price ceiling (a maximum price) is set above the market price, so it does not change the market equilibrium, which is P = $8 and Q = 8.

b) Shortage of 9 - With a price ceiling of $5, producers supply only 2 units of coffee beans. Consumers demand 11 units.

c) Price floor, P = $11 - We must find the price at which the horizontal distance between quantity supplied and quantity demanded is 9. Supply must be greater than demand for this to be a surplus.

Qs – Qd = 9 = (2P - 8) - (16 - P)

3P – 24 = 9

3P = 33

P = 11

Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result

Joes answered 3 years ago

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