Question

Refer to the figure entitled "Market for Meds". If a production quota of 20 units is imposed, what will be the change in consumer surplus? ОООО O Consumer surplus will increase by 22.5. Consumer surplus will decrease by 22.5. Consumer surplus will increase by 25. Consumer surplus will decrease by 25. Market for Meds 10 So Price (in $) 2 Do 0 0 10 20 40 30 Quantity

Answer 1

Answer
before quota, equilibrium is at Qd=Qs
where
P=5 and Q=25
CS=area above price and below demand curve =0.5*(Y-axis intercept of the demand curve -P)*Q
=0.5*(10-5)*25
=62.5
after quota
Q=20 then P=$6
CS=0.5*(10-6)*20
=40
change in consumer surplus =62.5-40=22.5
consumer surplus decreases by $22.5
option 2

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Answer

After quota P=6 and Q=20, minimum willingness to accept at the traded quantity =4=P(min)
PS =area below the price and above the supply curve and left of the quantity traded
PS=(P-P(min))*Q+0.5*P(min)*Q
=(6-4)*20+0.5*4*20
=80

option 3
$80