Question

The following supply and demand functions describe the competitive market Q2+4P Q40-2P where Q and Q" are the quantities supplied and demanded, and P is the market price.

Answer 1

The consumer and producer surplus in the following image is calculated using the area of triangle formula (1/2)*base*height. The new consumer surplus is the shaded area A.
Given, Q^s = -2 + 4p� Q^D = 40 - 2p� In equilibrium,� Q^s = Q^D� therefore -2 + 4p = 40 - 2p� 6p = 42� [p = 7]� gives Q = -2 + 4.7 = -2 + 28� [Q = 26]� when government imposes a production ceiling of 20 \r\n rightarrow Initial consumer surplus = 1/2 middot 13 middot 26 = 169� new consumer surplus = 1/2 middot 10 middot 20 = 100� therefore [change in consumer surplus = 169 - 100 = 69]� rightarrow similarly,� initial producer surplus = 1/2 middot (6.5)(26) = 84.5� new producer surplus = 1/2(5)(20) = 50� [therefore change in producer's surplus = 84.5 - 50 = 34.5]
since there is some deadweight loss due to the production ceiling by the government, therefore the policy is not efficient.