Question

Unit 7—Market Intervention: Price Ceilings and Floors, Taxes

Suppose that the demand curve for coffee is Q=10-P and the supply curve is Q=P. Draw the supply and demand curves below.

1. What is the equilibrium price and quantity?

Equilibrium price= $5, equilibrium quantity= $5

2. What is total surplus, consumer surplus, and producer surplus?

3. Suppose the government implemented a price floor at $7 per cup of coffee.  

   1. Identify the new quantities demanded and supplied and any surplus or shortage of coffee. What will the new quantity be in the coffee market?
      
      

   2. What is total surplus with the price floor? How much deadweight loss was created, if any?
      
      
      

   3. What is consumer and producer surplus? Did either consumer or producer surplus change? In what direction? Discuss in your group why consumer and producer surplus did or did not change.
      
      
      

4. Suppose the government implemented a price ceiling at $3 per cup of coffee.

   1. Identify the new quantities demanded and supplied and any surplus or shortage of coffee. What will the new quantity be in the coffee market?
      
      
      

5. Suppose the government imposed a $2 tax on the sellers. What would the new equilibrium price and quantity be? What it the total tax paid by the sellers? By the buyers?
   
   

Multiple choice questions

1. What would happen if the government implemented a price floor at $3?

   1. The price is $3, the quantity demanded is 7 cups of coffee and 3 cups are supplied, so there is a shortage.

   2. The price is $3, the quantity demanded is 3 cups of coffee and 7 cups are supplied, so there is a surplus.

   3. The price is $5 and the quantity demand is 5 and the quantity supplied is 5.

2. What would happen if the government implemented a price ceiling at $6?

   1. The price is $6, the quantity demanded is 4 cups of coffee and 6 cups are supplied, so there is a shortage.

   2. The price is $6, the quantity demanded is 6 cups of coffee and 4 cups are supplied, so there is a surplus.

   3. The price is $5 and the quantity demand is 5 and the quantity supplied is 5.

3. What if the government imposed a $1 tax per cup of coffee?

   1. Consumers pay $6 for each cup of coffee, sellers receive $5., and 4 cups of coffee are consumed.

   2. Consumers pay $5.50 for each cup of coffee, sellers receive $4.50, and 4.5 cups of coffee are consumed.

   3. Consumers pay $6 for each cup of coffee, sellers receive $5, and 5 cups of coffee are consumed.

Answer 1

Given that the demand curve, Q=10-P

and the supply curve , Q=P

according to this following table is made.

PRICE	DEMAND	SUPPLY
1	9	1	excess demand
2	8	2	excess demand
3	7	3	excess demand
4	6	4	excess demand
5	5	5	EQUILIBRIUM LEVEL, where suppy=demand
6	4	6	excess supply
7	3	7	excess supply

ACCORDING TO THIS THE GRAPH WOULD BE

ACCORDING to this blue colour indicates consumer surplus= apply formula of triangle =0.5*height*base=12.5

and yellow colour indicates producer surplus=apply formula of triangle =0.5*height*base=12.5

and ths, total surplus= consumer surplus+ producer surplus=12.5+12.5=25

now given , the government implement the price floor at $7

and at price $7, quantity demanded =3 and the quantity supplies = 7

thus there is situation of excess supply which means there is surplus of 4 quantity

according to this the deadweight is the yellow portion so the new price is $7 and the quantity is 3 . therefore,

the total surplus= 25-deadweight =25-[0.5*2*4]=25-4=$21

yes there is change in consumer surplus and the producer surplus, according to guven diagram deadweight loss is distributed equally on both consumer surplus and producer surplus

therefore, new consumer surplus=12.5-2=$10.5

and the new producer surplus = 12.5-2= $10.5

now assume there is price ceiling oat $3 which means there is demand= 7 and supply is 3 .

therfore it is the situation of excess demand.

therefore there is excess demand of 4 units

now the other situation i government imposed the tax of $2 on he equilibrium price therefore, it becomes the $7 per unit.

therefore, new equilibrium price = $7 and the quantity demanded = 3 and the quantity supplied=7.

total tax paid=$2 per unit, therefore= $2 on 3 unit = $6

multiple choice questions :

1]if the price floor at $3,

then the price is $3, the quantity demande is 3 cups cups of coffee and 7 cups are supplied, so there is a surpus.

2] if government implemented a price ceiling at $6

then, the price is $6, the quantity demanded is 4 cups of coffee and 6 cups are supplied, so there is a shortage.

3]if the government imposed a $1 tax per cup of coffee

then, consumer pay $6 for each cup of coffee, sellers receive $5, and 4 cups of coffee are consumed.