Question

10. Problems and Applications Q10 A market is described by the following supply-and-demand curves: QSQS =  = 3P3P QDQD =  = 400−P400−P The equilibrium price is and the equilibrium quantity is .Suppose the government imposes a price ceiling of $120. This price ceiling is   , and the market price will be . The quantity supplied will be , and the quantity demanded will be . Therefore, a price ceiling of $120 will result in   .Suppose the government imposes a price floor of $120. This price floor is   , and the market price will be . The quantity supplied will be and the quantity demanded will be . Therefore, a price floor of $120 will result in   . Instead of a price control, the government levies a tax on producers of $40. As a result, the new supply curve is: QSQS =  = 3(P−40)3P−40 With this tax, the market price will be , the quantity supplied will be , and the quantity demanded will be . The passage of such tax will result in   .

Answer 1

Qs = 3P

Qd = 400 - P

equilibrium where Qs = Qp

3P = 400 - P

P= $100

Q = 3*100 = 300

Price ceiling are maximum prices set by govt. for a particular good and as the market price is less than $120 ( price ceiling), this price ceiling is not binding.

The equilibrium price is $100 and the equilibrium quantity is 300.

Suppose the government imposes a price ceiling of $120. This price ceiling is not binding , and the market price will be $100. The quantity supplied will be 300 , and the quantity demanded will be 300.

Therefore, a price ceiling of $120 will result in neither surplus nor shortage.

Suppose the government imposes a price floor of $120. This price floor is binding, and the market price will be $120 . The quantity supplied will be 360 and the quantity demanded will be 280 . Therefore, a price floor of $120 will result in surplus .

Explanation:

Price floor are minimum prices set by govt. for a particular good and as the market price is less than $120 ( price floor), this price floor is binding.

Qs at P = 120,

Qs = 3*120 = 360

Qd at P = 120,

Qd = 400 - 120 = 280

As Qs> Qd - there is surplus

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Instead of a price control, the government levies a tax on producers of $40. As a result, the new supply curve is

Qs = 3(P- 40) = 3P - 120

the market price will be

Qd = Qs

400 - P = 3P - 120

520 = 4P

P = $130

Qs = Qd = (400 - 130) = 270

With this tax, the market price will be $130, the quantity supplied will be 270 , and the quantity demanded will be 270.

the passage of such tax will result in neither a shortage nor a surplus

Answer 2

A market is described by the following supply and demand curves: QS = 2P QD =300–P a Solve for the equilibrium price and quantity. b If the government imposes a price ceiling of $90, does a shortage or surplus (or neither) develop?What are the price, quantity supplied, quantity demanded and size of the shortage or surplus? c If the government imposes a price floor of $90, does a shortage or surplus (or neither) develop? What are the price, quantity supplied, quantity demanded and size of the shortage or surplus? d Instead of a price control, the government levies a tax on producers of $30. As a result, the new supply curve is QS = 2(P – 30). Does a shortage or surplus (or neither) develop? What are the price, quantity supplied, quantity demanded and size of the shortage or surplus?