Question 2. Consider the market for burritos in a hypothetical Canadian city, blessed with thousands of...
Question 2. Consider the market for burritos in a hypothetical Canadian city, blessed with thousands of students and dozens of small burritos stands. The demand and supply schedules are shown in the table.
|
Price ($) |
Quantity Demanded (Burritos) |
Quantity Supplied (Burritos) |
|
0.0 |
500 |
125 |
|
1.0 |
400 |
175 |
|
1.50 |
350 |
200 |
|
2.00 |
300 |
225 |
|
2.50 |
250 |
250 |
|
3.00 |
200 |
275 |
|
3.50 |
150 |
300 |
|
4.00 |
100 |
325 |
|
5.00 |
0 |
375 |
a) Graph the demand and supply curves. What is the free -market equilibrium in this market?
b) What is the total economic surplus in this market in the free-market equilibrium? What area in your diagram represents this economic surplus?
c) Suppose the local government, out of concern for the students' welfare, enforces a price ceiling on burritos at the price of $1.50. Show in your diagram the effect on price and quantity exchanged.
d) Are students better off as a result of this policy? Explain.
e) What happens to overall economic surplus in this marker as a result of the price ceiling? Show this in the diagram.
Homework Answers
a) Graph is shown below. Free market equilibrium has a price of $2.5 per unit and a quantity of 250 burritos.
b) Total economic surplus in this market in the free-market equilibrium is shown above. It is equal to the area between the demand and supply curves. It is equal to 0.5*(5-2.5)*250 + 0.5*(250 + 125)*2.5 = 781.25
c) The effect of a price ceiling on burritos at the price of $1.50 is shown below. This has created a shortage of (350 - 200) = 150 burritos.
d) Consumer surplus is now 0.5*(5-1.5 + 3 - 1.5)*200 = 500. Since CS is reduced so the students are worse off as a result of this policy.
e) There is a decline in the overall economic surplus in this marker as a result of the price ceiling. The reduction in total surplus is shown as deadweight loss.
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Question 2. Consider the market for burritos in a hypothetical
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