Question

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Unit 7-Market Intervention: Price Ceilings and Floors, Taxes Suppose that the demand curve for coffee is Q = 10-P and the supply curveis Q = P. Draw the supply and demand curves below. ܘ ܩ ܤ ܙ ܗ ܗ ܚ ܢ 1 2 3 4 5 6 7 8 9 10 1. What is the equilibrium price and quantity? 2. What is total surplus, consumer surplus, and producer surplus?

Answer 1

Demand cure (Prie) Te a 10-P ; fupply comie ; d'ap. as AB: Demand curve osi suleply aine rºck F - - - - (le antity) a 5 k At equilibiniwm 1.) I c Dicas loop= p . 102P. price . [5=pa] equilibrium ACE [Q*=*= 5 Jequilibimom Chiantity 2.) Consumer surplus is Area below demand curve and above the price line o : - (C.S.). Consumer surplus = Aree of a = }(AC) (CE) 215)(5)= 12.5 Producer surplus is. Area: above supply more and below the price line (P.S.) Prodhier surplusz free of A CoE = 1 (O) (CE) := (5)16)- 12.5 Total surplus = Prodan cer surplust consumer surplus = 12.5 + 12.5 = 25 sg unit

1 32 price floor of , & 7 percup of coffee. N le XF - UE | +- Hii K a s quartiyle>. a) Derantities demonoleil 10-p= 10-7 = 3 Quentity, supplied : csps 7 .. Surplus = 0% 0%=7-3=4 new Quantity = min {eo, 6'}=min {3, 1} : [ce = 3.] new Quantity is a . Total surplus & Area ADGt Area 4D Ho I I I (A4) (407. + (407 190+DH) . (3113) + £13)(1+3) [ tatel.combles = + = 21 ] Deadweight loss = Aree of a PEHD 1(01 7 (JE) 13 (4) (2) = „

= c) Consumer surplus = Area o D ADG = 1 (A4)(4D) cs =} (37(3) - 4.5 Producer surplus= Area of aD Ho = I Photolt) 14D) [psi = (1+4) (3) = ?? -16.5 - A lanoumer surplus cs, (so = 4.5-12-5 scongumer = -8.07 L surplus falls by & unita longumer surplus A producer surplus=ps, - Pso=16.5-2.5=4 - producer surplus increases by 4 units. . 3 5 7 10 Quantity Demended.: CDP = 10-p=10-3= 7 enantity supplied o W = p=3 Shortage = d'a%= 7-3 = 4 new Chastity = min { ao, at} = min { 7, 3} = 3