Let the supply and demand for coffee be given by the following schedule. Let the supply...

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Let the supply and demand for coffee be given by the following schedule.

Let the supply and demand for coffee be given by the following schedule. Р 3 4 5 6 7 8 9 10 11 Qs 100 200 300 400 500 600 700

business economics

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Answer 1

Answer #1

What quantity of coffee is efficient?

500 units

This is where Qd = Qs

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What quantity will be traded with price ceiling?

300 units

Qs = 300, Qd = 700. There will be a shortage of 400 units.

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How long will they have to wait in line to get coffee?

At Qs = 300, buyers are willing to pay $9 per coffee. They are paying $4 less, due to the price ceiling.

Since each minute waited is worth $0.20, they are willing to wait 4 / 0.20 = 20 minutes at this price.

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Consumer surplus before price ceiling:

CS = 1/2 x 5 x 500

CS = $1250

Price 12 S 7 D N 500 1000 Quantity

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Consumer surplus after price ceiling:

The blue shaded area:

CS = [1/2 x 5 x 500] - [1/2 x 2 x 200] + [2 x 300]

CS = 1250 - 200 + 600

CS = $1650

Price 12 S 9 7 5 D N 300 500 700 1000 Quantity

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Total cost of waiting in line?

The rectangle that represents the deviation between the price ceiling and the willingness to pay:

Area = [(9 - 5) x 300]

Area = $1200

Thus, the cost of waiting in line is $1200 in total.

In other words, 300 buyers are willing to wait 20 minutes each, where each minute is worth $0.20.

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