Question

Use the accompanying graph to answer these questions.

Price of X ($) Quantity of Good X OS

a. Suppose demand is D and supply is S⁰. If a price ceiling of $6 is imposed, what are the resulting shortage and full economic price?

Shortage:

Full economic price: $

b. Suppose demand is D and supply is S⁰. If a price floor of $12 is imposed, what is the resulting surplus? What is the cost to the government of purchasing any and all unsold units?

Surplus:  units

Cost to government: $

c. Suppose demand is D and supply is S⁰ so that equilibrium price is $10. If an excise tax of $6 is imposed on this product, what happens to the equilibrium price paid by consumers? The price received by producers? The number of units sold?

Equilibrium price paid by consumers: $

Price received by producers: $

Number of units sold:  units

d. Calculate the level of consumer and producer surplus when demand and supply are given by D and S⁰ respectively.

Consumer surplus: $

Producer surplus: $

e. Suppose demand is D and supply is S⁰. True or False: A price ceiling of $2 would be beneficial to consumers?

• True

• False

Answer 1

Answer to question parts (a) - (d)

a) Demand is & and Supply is so. A price ceiling of $6 is imposed. 99999 price So - price ceiling 24 - Quantity of At propice ceiling = $6, quantity demanded = 9 Supplied = 1 :0 and quantity Shortage = (4-1)=3 units Full economic frice = $12 . Price (6) So 14 price froon 1 5 2. Q uantity At the price floor quantity demanded = 1 and quantity supplied = 2.5 Surplus=(2.5 - 1) = 1.5 units

Govt. buys this surplus amount at $12 per unit. cost of Government = $(12 x 105) = $ 18 price($) 14 12 Guantity an excise tax of $6 is product &, equilibrium price Consumers increases to $12 . imposed on paid by price received by producers & is $6. No. of units sold = 1 unit. PA 14 To 2 c.s(area below Demand curve and above price) - arica 'a' = 2 x 2 x (14 - 10) = $4 P.scarrea below price, above supply curve) = area b = { x 2 x (10-2) = $8