Question

Using Supply and Demand to Analyze Markets — End of Chapter Problem

The Reinheitsgebot is a set of laws established in the 1500s that regulate the production and sale of beer in Germany. Among its provisions, the edict set maximum prices that brewers could charge at various times of the year: "From Michaelmas to Georgi, the price for one [Bavarian Liter] is not to exceed one Pfennig Munich value." Cheap beer — this must be a great thing for consumers. Suppose that the demand for beer is given by ??=6,000−1,500? and the supply of beer is given by ??=−1,000+2,000?

a. Accurately graph the demand, supply, and price ceiling curves.

b. Without the price ceiling of 1‑Pfennig.

What is the equilibrium price of beer? ____ Pfennings

What is the equilibrium quantity of beer?_____consumers

What is producer surplus? ______Pfennings

What is consumer surplus? _______Pfennings

c. With the price ceiling of 1‑Pfennig.

What is the producer surplus received by beer producers after the price ceiling is imposed? ______Pfennings

What is the consumer surplus received by beer drinkers after the price ceiling is imposed? ______ Pfennings

d. After the price ceiling is imposed, beer drinkers see their surplus

Answer 1

Solution:

a. As instructed following is the graph showing demand, supply and price ceiling.

The graph above shows, what happens to the quantity when price ceiling is imposed. Price ceiling is the price imposed by government above which sellers cannot charge price for the goods they sell to consumers. Explanation for the graph,

1. The x axis denotes quantity and y axis denotes price. The downward sloping curve is the demand curve showing negative relation between price and quantity. The upward sloping curve is the supply curve showing positive relation between price and quantity.
2. At equilibrium quantity demanded is 3000 where equilibrium price is 2.
3. 6,000 is the quantity demanded when price is zero. 0 goods are demanded when price is 4. (Explanation for 2nd and 3rd point are in further subparts.

B. Equilibrium is attained at a price where both demand and supply curve intersect. Equating, demand and supply functions.

QD = QS

6000 - 1500P = -1000 + 2000P

Solving the above equation, we get equilibrium price is at 2 Pfenning. Substituting the value of P we get equilibrium quantity is 3,000 units of beers.

Consumer surplus is the difference between price consumer's are willing to pay and what they acrually pay. If we calculate the area of triangle that lies below demand curve and above price, we'll get consumer surplus.

Producer surplus is the difference between the cost of manufacturing the product and the price supplier's actually get.If we calculate the area of triangle that lies above supply curve and below price, we'll get producer surplus.

Thus, we get solution for all the parts of question b:

(i) 2 Pfennings

(ii) 3000

(iiii) 3000

(iv) 3000

C. After price ceiling, Producer's surplus

Now, we know that any displacement from equilibrium causes reduction in surplus. This reduction is called deadweight loss.

Total surplus - producer's surplus - deadweight loss = consumer surplus

deadweight loss =

Substituitng in the formula, we get new consumer surplus reduced to 3000.

(i) 750 Pfennings

(ii) 3650 Pfennings

(D) After price ceiling is imposed, althought there is increase in consumer surplus. But due to fall in prices, we see shortage of good that is demand exceeds supply. So we can say that those who get beer at this price are well off, as they now get the same good at a lower possibility. However those who were capable of paying 2 Pfennings may fail to get the good and end up having no good at all.

So the consumer surplus is increased by those lucky buyers whose surplus got increased than before and was able to set off the loss of surplus of buyers who failed to get the good.