Question

1. Suppose demand and supply are given by Q^d = 60 – P and Q^s = P -20

1. What are the equilibrium quantity and price in this market?
2. Determine the quantity demanded, the quantity suppled, and the magnitude of the surplus id a price floor of $50 is imposed in this market.
3. Determine the quantity demanded, the quantity suppled, and the magnitude of the shortage if a price celling of $32 is imposed in this market. Also determine the full economic price paid by consumers.

Answer 1

At equilibrium Qd = Qs

60 – P = P – 20

80 = 2P

P = $40 and Q = 60 – 40 = 20 units

A) Hence the market price is $40 and quantity is 20 units

B) At a price floor of 50, quantity demanded is 60 – 50 = 10 units and quantity supplied is 50 – 20 = 30 units. Hence there is a surplus of 20 units.

C) At a price ceiling of 32, quantity demanded is 60 – 32 = 28 units and quantity supplied is 32 – 20 = 12 units. Hence there is a shortage of 28 – 12 = 16 units. Consumers are paying a full economic price of (60 – 12) = $48.